Economics Assignment 19 Ch.

7 Assignment

ST. ROSE OF LIMA’S COLLEGE

Economics
Chapter 7 Fiscal policy
Assignment
Name: __________________ Class:_______ ( ) Blk: ___Date:_____________ Marks:______/35
***Please upload P.4-5 of the assignment***
I. Multiple Choice Questions (11 marks)
Level one
1. Which of the following diagrams can best illustrate the effect of raising direct taxes?

A. Price level B. Price level

LRAS LRAS
SRAS2 SRAS
SRAS1

AD2
AD AD1
Aggregate Aggregate
0 0
output output

C. Price level D. Price level

LRAS LRAS2 LRAS1
SRAS

AD1
AD2 AD
Aggregate Aggregate
0 0
output output

2. Which of the following statements about a government budget is NOT necessarily true?
A. A government budget is a financial statement of a government’s estimated revenue and expenditure
in a fiscal year.
B. A government budget has either an expansionary effect or a contractionary effect on the real national
income in the long run.
C. The overall effect of a balanced budget is expansionary.
D. The overall effect of a surplus budget can be expansionary.

3. Which of the following budgets can be expansionary?

(1) A balanced budget
(2) A deficit budget
(3) A surplus budget
A. (2) only B. (3) only C. (1) and (2) only D. (1), (2) and (3)

4. Which of the following statements is correct?

A. The government can settle the problem of unemployment by raising direct taxes.
B. The government can solve the problems of inflation and overheating by raising indirect taxes.
C. The government can cool the economy by cutting direct taxes.
D. The government can stimulate economic growth in the short run by cutting indirect taxes.

1
Economics Assignment 19 Ch.7 Assignment

Level two
5. Suppose an economy faces the problem of unemployment in the short run. By cutting ________, the
government can increase people’s disposable income. As a result, ________ will increase and so will the
output level and the employment level.
A. direct taxes; the short run aggregate supply
B. direct taxes; the aggregate demand
C. indirect taxes; the short run aggregate supply
D. indirect taxes; the aggregate demand

6. Suppose an economy was in a state of long run equilibrium. Due to the increase in aggregate demand,
the economy experiences demand-pull inflation. Which of the following policies can help stabilise the
price and output levels in the long run?
(1) Cutting government expenditure
(2) Raising direct taxes
(3) Cutting indirect taxes
A. (1) and (2) only B. (1) and (3) only C. (2) and (3) only D. (1), (2) and (3)

7. Suppose Country X’s government adopts a new policy. The following diagram shows the short run
effect of the new policy.
Price level
LRAS
SRAS

AD1
AD2
Aggregate output
0

If the problem of income inequality worsens as a result of the new policy, which of the following
policies may have been adopted by the government?
A. Decreasing textbook assistance for needy students B. Lowering the profits tax
C. Raising the progressivity of the salaries tax D. Raising luxury taxes

8. Which pair of the following economic goals can be achieved at the same time by adjusting direct
taxes?
(1) Lowering the unemployment rate in the short run
(2) Relieving inflationary pressure in the short run
(3) Stimulating economic growth in the short run
A. (1) and (2) B. (1) and (3) C. (2) and (3) D. None of the above

9. Refer to the following diagram.

Price level
LRAS
SRAS1
SRAS2

X Y

AD2
AD1
Aggregate output
0

2
Economics Assignment 19 Ch.7 Assignment

If the equilibrium moves from Point X to Point Y, which of the following policies may have been
adopted by the government?
A. Cutting salaries tax and raising sales taxes
B. Cutting profits tax and reducing the progressivity of the salaries tax
C. Cutting property taxes and indirect taxes imposed on sellers
D. Cutting sales taxes and raising the progressivity of the salaries tax

10. Which of the following statements CANNOT explain why the overall effect of a balanced budget is
expansionary?
A. The expansionary effect of government expenditure is greater than the contractionary effect of
government revenue.
B. When both government expenditure and government revenue increase, part of households’ savings
are seized by the government to finance government expenditure.
C. The contractionary effect of a decrease in government expenditure is smaller than the expansionary
effect of a decrease in government revenue.
D. None of the above

Level three
11. Suppose the government wants to maintain price stability and low unemployment. Which of the
following can help the government meet the targets when the national income of its trading partner
decreases?
A. Lowering income taxes B. Increasing income taxes
C. Lowering general sales taxes D. Increasing general sales taxes

3
Economics Assignment 19 Ch.7 Assignment

ST. ROSE OF LIMA’S COLLEGE

Economics
Chapter 7 Fiscal policy
Assignment
Name: __________________ Class:_______ ( ) Blk: ___Date:_____________ Marks:______/35

I. Multiple Choice Questions (11 marks)

Choose the BEST answer for each question.
1 2 3 4 5 6 7 8 9 10 11

II. Questions (24 marks)

Write your answers in the space provided.

Level one
1a. State one expansionary fiscal policy affecting AD. (1 mark)
b. State one expansionary fiscal policy affecting SRAS. (1 mark)
___________________________________________________________________________________________

___________________________________________________________________________________________

Level two
2. Briefly explain the overall effect of a surplus budget. (3 marks)
___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

3. ‘In the long run, real national income will be restored to its long run equilibrium level. Thus, the
government cannot stimulate long run economic growth by a fiscal policy.’
Do you agree? Briefly explain your answer with ONE example. (4 marks)

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

4
Economics Assignment 19 Ch.7 Assignment

Level three
4. Economy C is experiencing a rapid economic growth in aggregate demand and hence aggregate
output. However, the economy has serious inflation.
a. With the aid of a diagram, explain how growth driven by aggregate demand puts inflationary pressure
on the economy. Explain whether the economic growth (increase in the output level) is sustainable in the
long run. (10 marks)
b. With the aid of another diagram, suggest ONE fiscal policy that can deal with the inflation. (5 marks)
___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________