KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

SEMESTER 1
2021/2022

ABBE1033 ECONOMICS

TUTORIAL 11: THREE STATES OF THE ECONOMY, FISCAL POLICY

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SECTION A: MULTIPLE-CHOICE QUESTIONS

1. Suppose the economy's short-run equilibrium point is to the left of the Natural Real GDP.
Which of the following is true?
A. The economy is in an inflationary gap.
B. The economy is in a recessionary gap.
C. The economy is in long-run equilibrium.
D. This situation is actually impossible.

Exhibit 1

2. Refer to Exhibit 1. The economy is in long-run equilibrium at point ___________.

A. A
B. B
C. C
D. D

3. Refer to Exhibit 1. If the economy is in short-run equilibrium at point A, _____________.

A. the (actual) unemployment rate is less than the natural unemployment rate.
B. the (actual) unemployment rate is equal to the natural unemployment rate.
C. the (actual) unemployment rate is greater than the natural unemployment rate.
D. the relationship between the (actual) unemployment rate and the natural unemployment
rate cannot be determined from the available information.

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 4. If the economy is in long-run equilibrium, _____________________________________.
A. prices will rise but wages will remain constant.
B. surpluses occur in labour market.
C. it is producing Natural Real GDP.
D. prices will remain constant but wages may rise.

5. An expansionary fiscal policy will _____________________.

A. always result in a budget deficit.
B. sometimes result in a budget deficit.
C. always result in a budget surplus.
D. never result in a budget surplus.

6. Fiscal policy refers to the _____________________.

A. manipulation of government spending and taxes to stabilise domestic output,
employment, and the price level
B. manipulation of government spending and taxes to achieve greater equality in the
distribution of income
C. altering of the interest rate to change aggregate demand
D. fact that equal increases in government spending and taxation will be contractionary

7. Unemployment compensation benefits are an example of __________ fiscal policy.

A. expansionary discretionary
B. automatic
C. contractionary
D. discretionary

8. The AD curve shifts to the right with a _________ in government purchases (G) or a
__________ in taxes.
A. rise; rise
B. rise; fall
C. fall; rise
D. fall; fall

9. If the government wishes to increase the level of real GDP, it might reduce ____________.
A. taxes
B. transfer payments
C. the size of the budget deficit
D. its purchases of goods and services

10. With a progressive income tax, the tax rate _________________.

A. falls as income rises
B. is constant as income falls
C. rises as income falls
D. falls as income falls

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 11. Contractionary fiscal policy actions include __________ government spending and/or
__________ taxes, while expansionary fiscal policy actions include __________
government spending and/or __________ taxes.
A. increasing; decreasing; decreasing; increasing
B. decreasing; decreasing; increasing; increasing
C. increasing; decreasing; increasing; decreasing
D. decreasing; increasing; increasing; decreasing

12. A balanced budget occurs when ______________________.

A. the national debt is reduced to zero dollars.
B. a budget deficit during one year is matched by a budget surplus in the next year.
C. transfer payments equal tax receipts.
D. government expenditures equal tax receipts.

SECTION B: ESSAY QUESTIONS

1. Using appropriate diagrams, discuss the difference between ‘recessionary’ and

‘inflationary’ gaps. (8 marks)

2 Using an appropriate diagram, describe the following:

(i) A recessionary gap. (4 marks)

(ii) An inflationary gap. (4 marks)

(iii) Long-run equilibrium. (4 marks)

3. Identify and briefly explain the type of fiscal policy that could be used to solve the
recessionary gap. (6 marks)

4. (a) Compare expansionary and contractionary fiscal policy. (6 marks)

(b) Differentiate between “progressive income tax” and “regressive income tax”.
(4 marks)

5. Describe how an expansionary fiscal policy helps to stimulate economic growth in an economy.
(8 marks)

6. An economy is said to be experiencing a higher level of Real Gross Domestic Product (GDP)
than the Natural Real GDP. With the aid of a diagram, discuss how the government could use
fiscal policies to solve this problem. (9 marks)

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