Week 7

Tutorial Questions
Question 1
Question 2
 Question 3
Which of the following statements is correct regarding fiscal policy?
a) Expansionary fiscal policy (e.g. increasing the government deficit or reducing
the surplus) always has a stabilising effect for the economy.
b) Unemployment benefits and taxes automatically increase government
spending and cut taxation in a downturn, while they trim spending and raise
taxes in a boom. These are, therefore, automatic stabilisers.
c) In a recession the aim of a government fiscal expansion is to over-ride the
effects of automatic stabilisers.
d) As a family worried about mounting debts should cut spending and save
more, so should an economy adopt austerity measures when its debt level is
high to restore its public finances to balance.
e) In a recession the government would use fiscal contraction to enhance the
effects of automatic stabilisers.
 Question 4
A8. The diagram on the right
depicts the relationship
between government
austerity and recession.
Which of the following
statements is correct?
a) The aggregate demand
line shifts downward and
the economy moves from
point A to point B. Lower
output reduces tax
revenues to the
government and
increases spending on unemployment benefits, worsening the budget
balance.
b) Lower output reduces tax revenues to the government and reduces spending
on unemployment benefits, improving the budget balance.
c) Suppose that the government reduces spending, from G to G’. This pushes
the aggregate demand line down further and the economy moves to point C;
the government action relieves the recession.
d) Suppose that the government increases spending. This action worsens the
recession.
e) The recession feeds back to reduce government transfers and increase tax
revenue.
 Question 5
Which of the following statements is correct regarding fiscal policy?
a) Unemployment benefits and proportional taxes are examples of automatic
stabilisers.
b) Expansionary fiscal policy always has a stabilising effect for the economy.
c) Contractionary fiscal policy always has a stabilising effect for the economy.
d) In a recession the government would use fiscal contraction to enhance the
effects of automatic stabilisers.
e) In a recession the aim of a government fiscal expansion is to over-ride the effects
of automatic stabilisers.
 Question 6
The phenomenon where the aggragate attempt of households to increase savingsleads
to a fall in aggragate income is known as (select one correct answer):
a) The paradox of thrift
b) Automatic stabilisers
c) A fiscal contraction
d) The fallacy of composition
e) A budget deficit
 Question 7
Which one of the following statements regarding fiscal policy and automaticstabilisers is
correct?
a) In a recession the aim of a government fiscal expansion is to over-ride the effects
of automatic stabilisers
b) Expansionary fiscal policy always has a stabilising effect on the economy
c) In a recession, the government would use fiscal expansion to enhance the effects
of automatic stabilisers
d) In a recession, the government would use fiscal contraction to enhance the
effects of automatic stabilisers
e) Decreasing government spending or increasing taxes are examples of fiscal
expansion
 Question 8
Which one of the following statements regarding the paradox of thrift and fallacy of
composition is correct?
a) The fallacy of composition states that the aggregate attempt of households to
increase savings leads to a fall in aggregate income
b) The paradox of thrift states that the aggregate attempt of households to increase
savings leads to a fall in aggregate income
c) The paradox of thrift is the mistaken inference that what is true for one part of the
economy must be true of the whole economy
d) The fallacy of composition is the mistaken inference that what is true for
employment must be true for inflation
e) The paradox of thrift states that the aggregate attempt of households to increase
savings leads to an increase in aggregate income
 Question 9
• Explain the two parts of aggregate consumption.
 Question 10
• Explain how marginal propensity to consume varies with
respect to poor and wealthy households.
 Question 11
• Explain the concept of multiplier effect.
 Question 12
• Changes in house prices affect consumption through two
channels. Explain.
 Question 13
• List the three factors that firms’ decision about what to do
with its profits depends on.
 Question 14
• Explain the two prominent factors that increase investment
in an economy.
 Question 15
• Explain why saving, taxation and imports are referred to as
leakages from the circular flow of income.
 Question 16
• Explain the different ways through which government
stabilises economic fluctuations.
 Question 17
Explain the concept of “the paradox of thrift” and “Fallacy of
composition”