Question 1

It is a fact that the government spending multiplier is always greater than the tax multiplier.

Accepted Answer

The government spending multiplier and the tax multiplier can vary depending on economic conditions, fiscal policies, and the responsiveness of the economy. There is no rule that the government spending multiplier is always greater than the tax multiplier.

Question 2

Those economists who view the AS curve as being vertical see more government tools capable of raising Real GDP than do the economists who view the AS curve as being upward-sloping.

Accepted Answer

Economists who view the AS curve as being upward-sloping believe that there are limits to the government's ability to increase Real GDP by using monetary and fiscal policies. This is because they believe that higher demand will eventually lead to higher prices, resulting in a decrease in Real GDP. Those who view the AS curve as being vertical believe that there are fewer such limits and more tools available to the government to increase Real GDP.

Question 3

Tax revenues can rise as a result of a decrease in income tax rates,as long as the tax base increases sufficiently.

Accepted Answer

When income tax rates decrease, it can stimulate economic growth and encourage people to earn and invest more, which can lead to an increase in the tax base. A larger tax base means more people are subject to taxation and overall tax revenues can increase. However, the extent to which tax revenues will rise is dependent on how much the tax base increases and the specific circumstances of the economy.

Question 4

If tax rates are cut,tax revenues may rise,fall,or remain unchanged.What actually happens is considered a(n)

Accepted Answer

This is an empirical issue because it can only be determined by examining actual data and observing what happens when tax rates are cut. The theoretical outcome may not always align with what happens in reality.

Question 5

"If we come to a company's rescue this time,they'll take more risks and we'll have to come to their rescue next time,too." The economist who said this most likely

Accepted Answer

The economist's skepticism towards coming to a company's rescue indicates that they are against bailouts, which is option C. The other options are not relevant to the statement made.

Question 6

If the AS curve is vertical,then it follows that

Accepted Answer

When the Aggregate Supply (AS) curve is vertical, it indicates that the economy is at its full capacity or potential output, meaning changes in aggregate demand will not affect the output level but will instead lead to changes in the price level. Therefore, real GDP changes cannot arise due to demand-side factors (since output is fixed at the potential level), and price level changes will arise from shifts in aggregate demand, as the supply side is unresponsive to price changes at this point.

Question 7

Economist B says all of the following: The economy needs expansionary fiscal policy to remove it from a recessionary gap. Government should either raise its __________ or cut _________________. I believe the tax multiplier is larger than the government spending multiplier,so I suggest government ___________________.

Accepted Answer

Economist B suggests using expansionary fiscal policy, which involves either increasing government spending or cutting taxes to stimulate the economy. Since they believe the tax multiplier is larger than the government spending multiplier, they recommend cutting taxes to have a more significant impact.

Question 8

If income tax rates are cut,the size of the budget deficit will necessarily increase.

Accepted Answer

It is not necessarily true that cutting income tax rates will increase the budget deficit. While cutting income tax rates may lead to a decrease in tax revenue, it could also potentially stimulate economic growth and increase overall tax revenue collected. Additionally, there are other factors that can impact the budget deficit, such as government spending and economic conditions.

Question 9

"Expansionary fiscal policy is needed to increase Real GDP --- at least in the short run." The economist who said this most likely believes that

Accepted Answer

The statement suggests that the economist believes in the effectiveness of expansionary fiscal policy in increasing Real GDP in the short run. This means that the AS curve is assumed to be upward-sloping, where an increase in aggregate demand via government spending or tax cuts can increase Real GDP. Option A is not relevant as the question does not compare tax and spending multipliers. Option B is incorrect because if the AS curve is vertical, then changes in aggregate demand will only affect prices and not output. Option C is incorrect as the question suggests that the economist believes in the short-run effectiveness of expansionary fiscal policy, which means they do not foresee significant crowding out effects.

Question 10

"It matters how the government spends any extra dollars." The economist who said this most likely believes that

Accepted Answer

The economist is suggesting that not all government spending has an equal impact on the economy, and that some projects may have a higher multiplier effect than others in terms of increasing Real GDP.

Question 11

"Politics is too often the thing that gets in the way of good economic policy being implemented." The economist who said this most likely

Accepted Answer

The statement suggests a preference for policies that are not easily influenced by political agendas or changes, which aligns with the concept of rule-based monetary policy. Rule-based policies are designed to follow a set of guidelines that limit the discretion of policymakers, thereby reducing the influence of politics on economic decisions.

Question 12

Economist A believes the economy is self-regulating. Economist B believes that wages and prices are inflexible downward. Economist C believes that the AS curve is vertical. Economist D believes that crowding out is likely to be complete. Which economist is most likely to advocate for expansionary fiscal policy in the in the form of greater government spending to remove an economy from a recessionary gap?

Accepted Answer

Economist B's belief that wages and prices are inflexible downward implies that in a recession, the economy may get stuck in a low output equilibrium. Therefore, this economist is likely to advocate for expansionary fiscal policy to increase aggregate demand and output. The other economists' beliefs suggest they would be less likely to support such a policy.

Question 13

If the aggregate supply curve is vertical,it follows that a change in

Accepted Answer

When the aggregate supply curve is vertical, it indicates that the economy is at its full capacity or potential output, meaning changes in aggregate demand (such as changes in the price level) can only originate from the demand side of the economy, not affecting the real GDP. However, changes in real GDP can still originate from the supply side due to factors like technology or resources, affecting the potential output itself.

Question 14

Economist A argues that a "dollar spent is a dollar spent." This economist is most likely to agree with which of the following:

Accepted Answer

Economist A's argument implies that the impact of government spending does not depend on what it is spent on, but rather the amount of spending. Therefore, choice A is the most likely to align with this viewpoint. The other options suggest that the specifics of government action do matter, which contradicts the statement that a "dollar spent is a dollar spent."

Question 15

Which of the statements is false?

Accepted Answer

The statement "The tax multiplier is necessarily larger than the government spending multiplier" is false. The size of the multiplier effect depends on various factors, such as the marginal propensity to consume and the level of existing economic activity. In some cases, the government spending multiplier may be larger than the tax multiplier, and vice versa.

Question 16

"Demand-side fiscal policy is capable of changing Real GDP." This statement would be most likely to be said by an economist who believes that

Accepted Answer

Demand-side fiscal policy, such as government spending and tax cuts, is aimed at influencing the level of demand in the economy. Economists who believe that the Aggregate Supply (AS) curve is upward sloping (B) think that increases in demand can lead to increases in output (Real GDP), as well as prices. Those who believe that there is little, if any, crowding out (D) also support the effectiveness of demand-side fiscal policy, as they argue that government spending does not fully replace (or crowd out) private sector spending. Therefore, both B and D support the statement, making E the correct choice.

Question 17

Which of the following is false?

Accepted Answer

All the statements provided are true, so none of them is false.

Question 18

"We lose more by letting the company fail than by having the government save it." This was most likely said by an economist who believes that

Accepted Answer

The statement suggests that the economist supports a government bailout of a failing company, indicating that they believe that bailouts can be necessary to prevent larger losses.

Question 19

"The only thing that results from expansionary demand-side fiscal policy is that the price level will rise." The economist who said this most likely believes that

Accepted Answer

The statement "The only thing that results from expansionary demand-side fiscal policy is that the price level will rise" suggests that the economist believes in the classical view of the AS curve being vertical in the short run, meaning that output remains unchanged and any increase in aggregate demand will only result in an increase in the price level. Therefore, there is no impact on employment or output, and any increase in government spending or reduction in taxes will not stimulate the economy in the long run. This view implies that there will be no crowding out effect, making choice C incorrect. Choices A, D, and E are also not relevant to the economist's view on the impact of expansionary demand-side fiscal policy.

Question 20

The Taylor Rule is an example of

Accepted Answer

The Taylor Rule is a rule-based monetary policy that gives central banks guidance on how to set interest rates based on the current state of the economy. It takes into account inflation and output levels, and aims to keep the economy in a stable equilibrium by adjusting interest rates accordingly. It is not discretionary, meaning that it is not subject to the individual preferences or biases of policymakers. It also does not set a fixed money supply growth rate, so option C is not correct. The Taylor Rule can be both expansionary or contractionary, depending on the state of the economy, so option D is also not correct.

Quiz 19: Debates in Macroeconomics Over the Role and Effects of Government