Week 12 Tutorial Questions PDF

1\. Which of the following would be considered a fiscal policy action? 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 stimul...

1\. Which of the following would be considered a fiscal policy action? 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. 2\. Which of the following is an automatic stabiliser? A\) Interest rate changes B\) Increases in government spending on schools C\) Reductions in nominal wages as inflation rates rise D\) Unemployment benefit payments to the unemployed 3\. An 'automatic stabiliser' is \_\_\_\_\_\_\_\_\_. A\) a policy for growth of an economy where the current account of the balance of payments is kept in balance B\) a monetary or fiscal policy that aims to smooth out the business cycle C\) the tendency for inflation to fall as unemployment rises D\) a tax or form of government expenditure that has the effect of reducing the size of business cycle fluctuations 4\. Discretionary fiscal policy is when \_\_\_\_\_\_\_\_\_. A\) existing taxation policy automatically smoothes out business cycle fluctuations in the economy B\) the government changes the levels of expenditure or taxation to achieve a macroeconomic aim C\) policy is left to the discretion of the Reserve Bank of Australia D\) politicians are discrete about policy changes and do not advise consumers or producers of new policies 5\. If real equilibrium GDP is below the long-run aggregate supply curve, an appropriate fiscal policy would be to \_\_\_\_\_\_\_\_\_. A\) increase government purchases and increase a budget deficit B\) pursue a contractionary fiscal policy by increasing the budget surplus C\) increase individual income taxes to balance the budget D\) increase business income taxes to increase tax fairness 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. ---------- ------------------- ---------------- ----------------- **Year** **Potential GDP** **Real GDP** **Price Level** 2022 \$1.5 trillion \$1.5 trillion 150 2023 \$1.7 trillion \$1.6 trillion 152 ---------- ------------------- ---------------- ----------------- 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 Short-answer Questions ====================== **Question 1** Suppose the Australian government has decided to increase its purchases by \$1 billion. Assume the Marginal Propensity to Consume (MPC) is constant and equal to 0.8. **[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. b. c. 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** This question focuses on the economic impacts precipitated by the COVID-19 pandemic. The first case of COVID-19 in Australia was detected on 25^th^ January 2020.\ Soon after, the Australian government moved to enforce travel restrictions, first with China (on 1^st^ February 2020), then the rest of the world (on 20^th^ 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. d. e. f. **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.