CALIFORNIA STATE UNIVERSITY, SACRAMENTO
Department of Economics

Prof. A. R. Gutowsky
Economics 1A

Problem Sets     1    2    3    4     5

Chapter 11
1. Review the material on how to derive the aggregate demand schedule.
2. Why is the aggregate supply schedule upward sloped?
        (A) What are the determinants of aggregate supply?
3. What determines the equilibrium price and output level?
        (A) Use aggregate demand and supply analysis to illustrate:
                (1) a recessionary gap
                (2) an inflationary gap
        (B) How does the economy adjust to a recessionary gap?
        (C) How does the economy adjust to an inflationary gap?
4. Does the economy have a self-adjusting mechanism?
        (A) What is meant by a self-adjusting mechanism?
                (1) How does the economy self-adjust to a recessionary gap?
                (2) How does the economy self-adjust to an inflationary gap?
5. What is stagflation?
6. What is a supply shock?
                (1) What is an adverse supply shock?
                (2) What factors could cause an adverse supply shock?
                (3) What is a favorable supply shock?
                (4) What factors might cause a favorable supply shock?
                (5) How does a supply shock cause stagflation?
7. Answer Question 1, 2, 3 on page 209.

Chapter 12
1. How will an autonomous tax affect the expenditure schedule? The aggregate demand schedule?
        (A) What is an autonomous tax?
        (B) Does an autonomous tax affect the intercept or the slope? Explain.
2. How will an induced tax affect the expenditure schedule? The aggregate demand schedule?
        (A) What is an induced tax?
        (B) Does an autonomous tax affect the intercept or the slope? Explain.
        (C) Explain how an induced tax changes the value of the multiplier.
3. What are automatic stabilizers?
4. Why the multiplier for a change in taxes less than that for a change in government expenditures?
5. What re transfer payments?
        (A) Why is a transfer payment called a negative tax?
6. What is an expansionary fiscal policy?
        (A) Assume the economy is experiencing a recessionary gap. What fiscal policy could be
              adopted to close the gap? Be specific when answering this question.
7. What is a restrictive fiscal policy?
        (A) Assume the economy is experiencing an inflationary gap. What fiscal policy could be
              adopted to close the gap? Be specific when answering this question.
8. To change spending policy or tax policy. That is the question. Explain.
9. Read the chapter section titled "Some Harsh Realities."
10 What is meant by BUD = T - G?
        (A) Given the following information. Assume the marginal propensity to tax = .20, complete the columns.
                       
Income Government Taxes State of Expenditures Budget
1000                                             250
1500                                             300
2000                                             400
2500                                             425
3000                                             440

11. What is meant by a supply side tax cut?
12. What are the "flies in the ointment" as far as fiscal policy is concerned?
13. What are the allocation, distribution and stabilization effects of fiscal policy?
        (A) Repeat the above question as they pertain to a tax cut?
        (B) Repeat the above question as they pertain to an increase in government expenditures.
14. Read the appendix to this chapter.
15. Answer questions 1 and 3 on page 231.


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