Question 1

If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to
A)counteract the recession.
B)prolong the recession and increase its severity.
C)end the recession sooner.
D)increase the level of real GDP.

Accepted Answer

According to the Keynesian model, during a recession, the government should increase spending or decrease taxes to stimulate demand and stimulate economic activity. However, if the government raises taxes during a recession, it will decrease disposable income and reduce aggregate demand, leading to a further contraction of the economy and exacerbating the recession. As a result, the recession will be prolonged and its severity will increase.

Question 2

What is fiscal policy? What is the relationship between fiscal policy and the federal budget?

Accepted Answer

The answer of What is fiscal policy? What is the...

Question 3

How does Keynesian economic theory recommend that fiscal policy be conducted?

Accepted Answer

The answer of How does Keynesian economic theory recommend that...

Question 4

According to the Keynesian model, in what ways will expansionary fiscal policy stimulate aggregate demand?

Accepted Answer

The answer of According to the Keynesian model, in what...

Question 5

What three types of timing problems might policy makers experience when conducting discretionary fiscal policy?

Accepted Answer

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Question 6

According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?
A)a reduction in government expenditures and/or an increase in taxes
B)an increase in government expenditures and/or a reduction in taxes
C)make no policy changes because market forces will assure the maintenance of full employment.
D)maintain a balanced budget

Accepted Answer

According to the Keynesian view, in order to combat a potential recession, policy makers should increase government expenditures and/or reduce taxes. This would increase aggregate demand and stimulate economic growth, thereby avoiding a recession. Cutting government expenditures or increasing taxes would only decrease aggregate demand and worsen the situation, potentially leading to a deeper recession. Maintaining a balanced budget would not be an appropriate response, as it would not provide any stimulus to the economy.

Question 7

If the federal government is running a budget deficit,
A)the national debt will decline.
B)it will have to either raise taxes or reduce expenditures next year.
C)the U.S.Treasury will finance the deficit by issuing additional bonds.
D)the supply of money will increase and the general level of prices will rise.

Accepted Answer

When the federal government runs a budget deficit, it means that its expenditures exceed its revenues. To cover this shortfall, the U.S. Treasury needs to finance the deficit by issuing additional bonds, which will add to the national debt. This is typically done by selling Treasury bonds in the open market, and investors such as individuals, institutions, or foreign governments are willing to buy these bonds because they offer a safe and relatively low-risk investment option compared to other assets. Therefore, choice C is the best answer. Choices A, B, and D are incorrect because they do not accurately reflect the consequences of a budget deficit. The national debt will increase, not decline, with a deficit; raising taxes or cutting expenditures may be the solution to reduce future deficits, but it is not an immediate consequence of a deficit; and while a deficit may cause inflation in some cases, it is not a necessary outcome, and it depends on various factors such as the state of the economy, the level of demand, and the supply of goods and services.

Question 8

Keynesian analysis stresses that a tax cut that increases the government's budget deficit (or reduces its budget surplus)
A)is appropriate during a period of inflation.
B)will increase the money supply.
C)will stimulate aggregate supply and, thereby, promote employment.
D)will stimulate aggregate demand and, thereby, promote employment.

Accepted Answer

Keynesian analysis argues that a tax cut that increases the government's budget deficit (or reduces its budget surplus) will stimulate aggregate demand and increase consumer spending, leading to an increase in economic output and employment. This is because the increase in disposable income encourages people to spend more, which in turn stimulates businesses to produce more goods and services, leading to increased employment opportunities.

Question 9

Is there any way to conduct fiscal policy and avoid the lags involved with discretionary policy?

Accepted Answer

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Quiz 11: Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to

What is fiscal policy? What is the relationship between fiscal policy and the federal budget?

How does Keynesian economic theory recommend that fiscal policy be conducted?

According to the Keynesian model, in what ways will expansionary fiscal policy stimulate aggregate demand?

What three types of timing problems might policy makers experience when conducting discretionary fiscal policy?

According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?

If the federal government is running a budget deficit,

Keynesian analysis stresses that a tax cut that increases the government's budget deficit (or reduces its budget surplus)

Is there any way to conduct fiscal policy and avoid the lags involved with discretionary policy?