Exam skills
Fiscal policy versus monetary policy
1
Example 1
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?
A.
B.
P
P
SRAS
AD0
AD0
AD1
0
Y
C.
P
D.
P
LRAS1 LRAS0
Y
AD1
0
Y
LRAS0 LRAS1
AD0
AD
0
SRAS0
SRAS1
0
AD1
Y
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 carefully
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?
Hint: More than one policy
4
1. Study the questions carefully
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?
TWO policies
1. Raising income taxes
2. Issuing bonds
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2. List the relevant information you have
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?
Student A ONLY knows the following:
Policy
Effect on
AS curve
Effect on
AD curve
Effect on Y
1. Raising income taxes
?
Shifts
leftwards

(Contractionary)
2. Issuing bonds
?
Shifts
leftwards

(Contractionary)
Overall effects
?
Shifts
leftwards

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3. Choose your answer strategically
Strategy
1: Possible
strategy
Suppose the
governmentchoice
raises income
taxes and issues bonds at the
same
time.
of the following
best illustrate
overall effects
a.
Find
theWhich
diagram(s)
with a can
leftward
shift inthe
AD.
of the above changes on price and output levels?
b.
Find the diagram with a decrease in Y.
A. P
B.
P
SRAS
AD0
AD0
AD1
0
Y
C.
P
D.
P
LRAS1 LRAS0
Y
AD1
0
Y
LRAS0 LRAS1
AD0
AD
0
SRAS0
SRAS1
0
AD1
Y
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3. Choose your answer strategically
Strategy 2: Elimination method
Can you choose
the best answer
now?
No
No?!
Well done
Yes
Yes
Eliminate
an option
Eliminate an
option
No
Can you
choose
the best
answer
now?
No
Eliminate
an option
Skip this question
and try it later!
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3. Choose your answer strategically
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?
Student B ONLY knows the following:
Policy
Effect on
AS curve
Effect on
AD curve
Effect on Y
1. Raising income taxes
?
Change

(Contractionary)
2. Issuing bonds
?
Change

(Contractionary)
Overall effects
?
Change

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3. Choose your answer strategically
Suppose the government raises income taxes and issues bonds at the
same time. Which of the following can best illustrate the overall effects
AD must change.
of the above changes on price and output levels?
A.
B.
P
P
SRAS
AD0
AD0
AD1
0
Y
C.
P
D.
P
LRAS1 LRAS0
Y
AD1
0
Y
LRAS0 LRAS1
AD0
AD
0
SRAS0
SRAS1
0
AD1
Y
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3. Choose your answer
Both are strategically
contractionary policies.
Suppose the government raises income taxes and issues bonds at the
same time. Which of the following can best illustrate the overall effects
Y must decrease.
of the above changes on price and output levels?
A.
B.
P
P
SRAS
SRAS0
SRAS1
Option A is the answer.
AD0
AD0
AD1
0
Y
C.
P
0
D.
P
LRAS1 LRAS0
Y
Y
LRAS0 LRAS1
AD0
AD
0
AD1
0
AD1
Y
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More examples will be provided later.
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