Exam skills

Fiscal policy versus monetary policy

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Example 1Suppose the government raises income taxes and issues bonds at the same time. Which of the following can best illustrate the overall effects of the above changes on price and output levels?

0 Y

SRAS

AD0AD1

A. B.

C.

D.

P

Y

SRAS0

AD0AD1

P

0

0 Y

AD

LRAS0P

0 Y

AD0

LRAS0

AD1

P

SRAS1

LRAS1 LRAS1

2

You should...1. Study the questions carefully

2. List the relevant information you have

3. Choose your answer strategically

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1. Study the questions carefullySuppose the government raises income taxes and issues bonds at the same time. Which of the following can best illustrate the overall effects of the above changes on price and output levels?

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Hint: More than one policy

Suppose the government raises income taxes and issues bonds at the same time. Which of the following can best illustrate the overall effects of the above changes on price and output levels?

1. Study the questions carefully

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TWO policies1.Raising income taxes2. Issuing bonds

2. List the relevant information you have

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PolicyEffect onAS curve

Effect onAD curve

Effect on Y

1. Raising income taxes

2. Issuing bonds

Overall effects

Suppose the government raises income taxes and issues bonds at the same time. Which of the following can best illustrate the overall effects of the above changes on price and output levels?

? Shiftsleftwards

?Shifts

leftwards

? Shiftsleftwards

(Contractionary)

(Contractionary)

Student A ONLY knows the following:

Suppose the government raises income taxes and issues bonds at the same time. Which of the following can best illustrate the overall effects of the above changes on price and output levels?b. Find the diagram with a decrease in Y.

Strategy 1: Possible choice strategya. Find the diagram(s) with a leftward shift in AD.

3. Choose your answer strategically

0 Y

SRAS

AD0AD1

A. B.

C.

D.

P

Y

SRAS0

AD0AD1

P

0

0 Y

AD

LRAS0P

0 Y

AD0

LRAS0

AD1

P

SRAS1

LRAS1 LRAS1

7

No

Yes

3. Choose your answer strategically

8

Yes

No

Well done

Eliminate an option

Can you choose the best answer now?

Eliminate an option

Eliminate an option

No

No?!

Skip this question and try it later!

Can you choose the best answer now?

Strategy 2: Elimination method

PolicyEffect onAS curve

Effect onAD curve

Effect on Y

1. Raising income taxes

2. Issuing bonds

Overall effects

3. Choose your answer strategically

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Suppose the government raises income taxes and issues bonds at the same time. Which of the following can best illustrate the overall effects of the above changes on price and output levels?

Change

Change

Change

Student B ONLY knows the following:

(Contractionary)

(Contractionary)

?

?

?

Suppose the government raises income taxes and issues bonds at the same time. Which of the following can best illustrate the overall effects of the above changes on price and output levels?

3. Choose your answer strategically

0 Y

SRAS

AD0AD1

A. B.

C.

D.

P

Y

SRAS0

AD0AD1

P

0

0 Y

AD

LRAS0P

0 Y

AD0

LRAS0

AD1

P

SRAS1

LRAS1 LRAS1

10

AD must change.

Suppose the government raises income taxes and issues bonds at the same time. Which of the following can best illustrate the overall effects of the above changes on price and output levels?

3. Choose your answer strategically

0 Y

SRAS

AD0AD1

A. B.

C.

D.

P

Y

SRAS0

AD0AD1

P

0

0 Y

AD

LRAS0P

0 Y

AD0

LRAS0

AD1

P

SRAS1

LRAS1 LRAS1

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Y must decrease.

Both are contractionary policies.

Option A is the answer.

More examples will be provided later.

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