1. Explain what effect an expansionary fiscal policy would have on the price level and real GDP starting from full employment equilibrium.

2. Why does a larger government budget deficit increase the magnitude of the crowding-out effect?

3. How does the multiplier work and what might government use it for?

4. Explain what effect a contractionary fiscal policy would have on the price level and real GDP starting from full employment equilibrium.

5. What are automatic stabilizers and how do they affect the economy? Which is the most important?

6. Suppose government spending increases in a closed economy. Would the effect on aggregate demand be larger if the Bank of Canada took no action in response, or if the Bank were committed to maintaining a fixed interest rate? Explain (6 Marks)

7. In which of the following circumstances is expansionary fiscal policy more likely to lead to a short-run increase in investment? Explain          1. when investment accelerator is large, or when it is small?

         2. when the interest sensitivity of investment is large, or when it is small?

         3. when the marginal propensity to import is small, or when it is large?

8. For various reasons, fiscal policy changes automatically then output and employment fluctuate.

         1. Explain why tax revenue changes when the economy goes into a recession.

         2. Explain why government spending changes when the economy goes into a recession.

         3. If the government were to operate under as strict balanced-budget rule, what would it have to do in a recession? Would that make the recession more or less severe?