Question 1

Exhibit 26-1 
-According to Exhibit 26-1, when real GDP equals potential GDP,

Accepted Answer

The answer of Exhibit 26-1 
-According to Exhibit 26-1, when...

Question 2

In using countercyclical policy during a recession, the government faces a tradeoff between reducing unemployment now and reducing inflation in the long run. Please explain.

Accepted Answer

The answer of In using countercyclical policy during a recession,...

Question 3

If real GDP equals C in the diagram below,
a.
distance df represents a budget surplus.
b.
distance de represents a budget surplus.
c.
there is a structural surplus.
d.
there is a structural deficit.
e.
distance de represents a cyclical surplus.

Accepted Answer

The answer of If real GDP equals C in the...

Question 4

What are the arguments used by the proponents of discretionary fiscal policy?

Accepted Answer

The answer of What are the arguments used by the...

Question 5

Suppose that, because of a decline in investment expenditures in a hypothetical economy in the year 2011, real GDP follows the path ABCDE in the figure below. If a discretionary policy were used that was timely and not too little or too large, show how the path in the figure would change. Use the IA-AD curve analysis to show the consequence of this discretionary fiscal policy.

Accepted Answer

The answer of Suppose that, because of a decline in...

Question 6

Which of the following Nobel laureate economists is against the use of discretionary fiscal policy?

Accepted Answer

Milton Friedman was against the use of discretionary fiscal policy and instead advocated for a strict monetary policy. Tobin, Keynes, and Krugman have all expressed support for the use of discretionary fiscal policy.

Question 7

The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003 was implemented amidst concerns about the slow recovery of the economy following the 2001 recession.

Accepted Answer

The statement is true.

Question 8

There is an inverse relationship between the budget deficit and real GDP because

Accepted Answer

As real GDP increases, tax revenue increases and transfer payments decline. This means that the government is collecting more revenue through taxes from individuals and businesses as the economy grows, while at the same time having to spend less on transfer programs such as unemployment benefits and welfare. This leads to a decrease in the budget deficit as there is more money coming in and less money going out.

Question 9

If real GDP equals B in the figure below, then
a.
None of these
b.
there is a structural surplus.
c.
there is a structural deficit.
d.
the difference between government expenditures and tax revenue is equal to zero.
e.
real GDP equals potential GDP.

Accepted Answer

The answer of If real GDP equals B in the...

Question 10

The structural budget surplus is the size of the budget surplus when
a.
there is a spending balance.
b.
the AD curve intersects the IA line.
c.
the unemployment rate is zero.
d.
the economy is in an expansion.
e.
real and potential GDP are equal.

Accepted Answer

The answer of The structural budget surplus is the size...

Question 11

Which of the following is not an argument for the use of rules over discretion?

Accepted Answer

The answer of Which of the following is not an...

Question 12

Why is discretionary fiscal policy considered risky or somewhat uncertain?

Accepted Answer

The answer of Why is discretionary fiscal policy considered risky...

Question 13

Policy rules tend to make the budget balance less predictable.

Accepted Answer

Policy rules, when consistently applied, can make the budget balance more predictable by establishing clear guidelines for revenue and spending, reducing the impact of ad hoc decision-making.

Question 14

Policy rules tend to have the economy running a budget deficit during a recession and a budget surplus during an expansion.

Accepted Answer

This is known as a countercyclical fiscal policy, where the government increases spending and/or reduces taxes during a recession to boost economic activity and reduce unemployment, resulting in a budget deficit. Conversely, during an expansion, the government decreases spending and/or increases taxes to avoid overheating the economy and keep inflation in check, resulting in a budget surplus.

Question 15

The recent use of discretionary fiscal policy was facilitated by

Accepted Answer

The recent use of discretionary fiscal policy was facilitated by the prediction of high rates of unemployment that could occur in the future if the government did nothing. This situation led policymakers to take action through discretionary fiscal policy measures to support economic growth and job creation.

Question 16

Automatic fiscal policy is an example of a policy rule.

Accepted Answer

Automatic fiscal policy refers to changes in government spending or tax revenue that occur automatically in response to changes in the economy, without the need for discretionary action by policymakers. This is an example of a policy rule, as the parameters for the automatic changes are pre-determined and do not require constant intervention by policymakers.

Question 17

Critics of discretionary fiscal policy emphasize

Accepted Answer

Critics of discretionary fiscal policy often point out the implementation lags associated with it. Discretionary fiscal policy involves making deliberate changes to government spending or taxation policies to stimulate or slow down the economy. However, implementing such changes can take time, making it difficult to time the policy changes precisely to be effective in stabilizing the economy. Additionally, implementation lags can be longer in democracies with complex legislative processes or in economies with a high degree of decentralization.

Question 18

In practice, automatic fiscal policy has helped stabilize the economy.

Accepted Answer

Automatic fiscal policy, such as the use of automatic stabilizers like unemployment benefits and progressive taxation, has been shown to help stabilize the economy during times of economic downturns. This is because these policies provide support to individuals and businesses, increasing their spending and helping to boost the overall economy.

Question 19

A policy rule

Accepted Answer

The answer of A policy rule
...

Question 20

Transfer payments are not affected by cyclical activity.

Accepted Answer

Transfer payments, such as unemployment benefits and welfare, often increase during economic downturns as more people become eligible for these programs, indicating they are affected by cyclical activity.

Quiz 14: Fiscal Policy

Exhibit 26-1 -According to Exhibit 26-1, when real GDP equals potential GDP,