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Week 12 - Tutorial Questions-1
Week 12 - Tutorial Questions-1
1. Which of the following would be considered a fiscal policy action(chính sách tài
khoá)?
A) A city changes its rates of land tax.
B) A federal government creates a subsidy for hybrid cars to encourage the purchase
of fuel-efficient cars.
C) Foreign aid is given to Indonesia.
D) A tax cut is designed to stimulate spending during an economic contraction.
6. Consider the hypothetical information in the following table for potential GDP, real
GDP, and the price level in 2022 and in 2023 if the government does not use fiscal
policy.
If the government wants to keep real GDP at its potential level in 2023, it should
_________.
A) decrease income taxes
B) decrease government purchases
C) Increase interest rates
D) increase income taxes
7. If the economy is growing beyond potential GDP, which of the following would be
an appropriate fiscal policy to bring the economy back to long-run aggregate supply?
An increase in _________.
A) liquidity and a decrease in interest rates
B) government purchases
C) taxes
D) oil prices
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Short-answer Questions
Question 1
Required:
a. How much will Real GDP increase as a result of the above increase in
government purchases?
b. Explain clearly, with the help of a flow chart, the process through which Real
GDP will increase.
c. In the real world, the increase in Real GDP will be less than predicted in this
question. Identify and explain the reasons why the increase in Real GDP will
be lower than expected.
Question 2
Suppose that real GDP for an economy is currently $300 billion and potential GDP is
$360 billion. The marginal propensity to consume (MPC) is 0.6.
Required:
a. Holding other factors constant, by how much will government purchases need
to be increased to bring the economy to equilibrium at potential GDP?
Tip: You should first calculate the multiplier effect for government spending.
b. Holding other factors constant, by how much will taxes have to be cut to bring
the economy to equilibrium at potential GDP?
Tip: You should first calculate the multiplier effect for tax cut.
c. In the early months of 2008, the US economy slumped into a severe recession
(dubbed the “Great Recession”). In an attempt to rescue the economy, the US
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government under President Barack Obama opted for increasing government
purchases instead of cutting taxes.
Can you explain why government purchases was selected as the centre of the
stimulus package instead of tax cuts?
Tip: Compare the multiplier effect for government purchases versus the
multiplier effect for tax cuts
Question 3
The first case of COVID-19 in Australia was detected on 25th January 2020.
Soon after, the Australian government moved to enforce travel restrictions, first with
China (on 1st February 2020), then the rest of the world (on 20th March 2020).
In late March 2020, the entire country was plunged in lockdown with all state
governments imposing social distancing measures to combat the spread of the virus.
In April 2020, it was reported that 600,000 jobs were lost and 495,000 people left the
labour force, becoming discouraged workers.
The economic conditions in 2020 were undoubtedly dire.
Required
a. Clearly explain how COVID-19 and all the consequent events described above
would affect aggregate demand and aggregate supply (both short-run and long-
run) in the Australian economy.
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c. Given the economic conditions described above, which type of fiscal policy
should the federal government implement?Clearly explain such a fiscal policy
is needed.
Question 4
Suppose that real GDP for an economy is currently $13.1 trillion, potential GDP is
$13.5 trillion, the government purchases multiplier is 2, and the tax multiplier is –1.6.
a. Holding other factors constant, by how much will government purchases
need to be increased to bring the economy to equilibrium at potential
GDP?
b. Holding other factors constant, by how much will taxes have to be cut to
bring the economy to equilibrium at potential GDP?
c. Construct an example of a combination of increased government spending
and tax cuts that will bring the economy to equilibrium at potential GDP.
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