Problem 1. In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price level stability under these conditions the government should:
- increase tax rates and reduce government spending.
- discourage personal saving by reducing the interest rate on government bonds.
- increase government expenditures.
- encourage private investment by reducing corporate income taxes.
Problem 2. We can expect the IS-curve to get steeper, as:
- money demand becomes less sensitive to changes in the interest rate
- the marginal propensity to save increases
- investment becomes more sensitive to changes in the interest rate
- the income tax rate decreases
- the expenditure multiplier increases
Problem 3. If the government increases taxes, which of the following is LEAST likely to occur?
- a decrease in private domestic saving
- a decrease in consumption
- an increase in private domestic investment
- a decrease in net exports
- a decrease in national income