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11) Refer to Figure 18-1. Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a movement from ________ using the static AD-AS model in the figure above. A) D to C B) C to B C) A to E D) B to A E) E to A 12) An increase in individual income taxes ________ disposable income, which ________ consumption spending. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases 13) Tax cuts on business income increase aggregate demand by increasing A) business investment spending. B) consumption spending. C) government spending. D) wage rates. 14) Tax cuts on business income ________ aggregate demand. A) would decrease B) would increase C) would not change D) may increase or decrease 15) If the economy is falling below potential real 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) the money supply and a decrease in interest rates. B) government purchases. C) oil prices. D) taxes. 16) Which of the following is considered contractionary fiscal policy? A) Congress increases the income tax rate. B) Congress increases defense spending. C) Legislation removes a college tuition deduction from federal income taxes. D) The New Jersey legislature cuts highway spending to balance its budget. 17) Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower 18) Expansionary fiscal policy involves increasing government purchases or increasing taxes. 19) Contractionary fiscal policy is used to decrease aggregate demand in an attempt to fight rising inflation. 20) Lowering the individual income tax will increase household disposable income and consumption spending. 21) What is expansionary fiscal policy? What is contractionary fiscal policy? 22) Does expansionary fiscal policy directly increase the money supply? Isn’t it true that the president and Congress fight recessions by spending more money? 23) The problem typically during a recession is not that there is too little money, but too little spending. If the problem was too little money, what would be its cause? If the problem was too little spending, what could be its cause?

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