Question Details

The most probable reason why consumer spending increased by more than taxes were reduced 



1. "I promise to reduce the federal deficit. That means reducing federal expenditures and, if necessary, increasing taxes. Under present conditions of full employment and steady prices, we can afford to bear the burden of this debt now instead of passing it on to 18 
our grandchildren." If the policies of this politician were adopted, what effects would be expected while these policies were being implemented? 
a) higher inflation b) increased imports 
c) higher rates of economic growth d) increased unemployment and idle capacity 
2. "Although initially the news looked good, with growth of 4.2 per cent in the final three months of the year, closer examination showed a sharp drop in consumer spending and a large expansion in inventories." This news is not good because 
a) firms will cut output to lower inventories 
b) higher inventories will decrease aggregate demand 
c) although aggregate demand is higher by 4.2 per cent, this is not sustainable 
d) a drop in consumer spending decreases saving which lowers aggregate demand 
3. "For the people around here this extra million dollars of government spending means 42 direct jobs and, depending on the employment multiplier you prefer, another 120 or 160 indirect jobs. In the bush. On the booming grounds. In the drugstore." Per million dollars, the magnitude of the employment multiplier is 
a) 42 b) above 42 but less than 162 c) between 162 and 202 d) more than 202 
4. "The extent of the downturn surprised many analysts. According to the Council, the real gross domestic product fell at an annual rate of 4 percent. If an apparently unplanned buildup of inventories is taken into account, the rate of decline is estimated at 7.6 percent." What has happened here? 
a) Both GDP and aggregate demand have fallen by 4% 
b) Both GDP and aggregate demand have fallen by 7.6% 
c) GDP has fallen by 7.6% and aggregate demand has fallen by 4% 
d) GDP has fallen by 4% and aggregate demand has fallen by 7.6% 
5. "A $4 billion tax cut was accompanied by a $6 billion increase in consumer spending in the same year." The most probable reason why consumer spending increased by more than taxes were reduced is that 
a) the tax cut reduced interest rates which in turn stimulated consumer spending by others 
b) lower taxes required lower government spending which in turn encouraged private spending by others 
c) spending by those with higher take-home pay in turn generated additional production and spending by others 
d) the tax cut induced more transfer payments which in turn caused an increase in consumer spending by others



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