Question 1

The time that elapses between the beginning of a recession or an inﬂationary episode and the identiﬁcation of the macroeconomic problem is referred to as a(n)

Accepted Answer

The term used in economics for the time that elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is called recognition lag.

Question 2

The crowding-out effect arises when

Accepted Answer

The crowding-out effect occurs when the government borrows in the money market, causing an increase in demand for loanable funds which in turn raises interest rates. This makes it more expensive for private firms to borrow and invest, which can ultimately reduce the effectiveness of government spending and hinder economic growth.

Question 3

Assume that if there were no crowding out, an increase in government spending would increase GDP by $100 billion. If there had been partial crowding out, however, then GDP would have

Accepted Answer

If there is partial crowding out, it means that the increase in government spending would lead to a decrease in private investment, as interest rates rise due to increased demand for borrowing. This decrease in private investment would partially offset the increase in government spending, resulting in a smaller increase in GDP than $100 billion. Therefore, GDP would increase by less than $100 billion.

Question 4

The lag between the time that the need for ﬁscal action is recognized and the time action is actually taken is referred to as the

Accepted Answer

The administrative lag refers to the delay between recognizing the need for fiscal action and the implementation of that action.

Question 5

The crowding-out effect suggests that

Accepted Answer

The crowding-out effect suggests that increases in government spending may reduce private investment. This happens because government spending increases demand for goods and services, which can lead to higher prices and interest rates, which in turn can discourage private investment.

Question 6

The crowding-out effect tends to be stronger when the economy

Accepted Answer

The crowding-out effect occurs when an increase in government spending leads to a decrease in private investment. This happens because the increase in government spending leads to an increase in interest rates, which makes borrowing more expensive for businesses and individuals. This tends to be stronger when the economy is at or close to full employment, as there is less excess capacity to absorb the increase in demand from government spending.

Question 7

If the crowding-out effect is at its maximum strength, it follows that an increase in government spending will

Accepted Answer

When the crowding-out effect is at its maximum, increased government spending leads to a complete offset by reduced private investment, leaving aggregate demand and GDP unchanged.

Question 8

One timing problem in using ﬁscal policy to counter a recession is the "administrative lag" that occurs between the

Accepted Answer

Administrative lag refers to the delay between recognizing the need for fiscal action and the actual implementation of these measures. This can slow down the effectiveness of fiscal policy in countering a recession.

Question 9

The United States is experiencing a recession and Congress decides to adopt an expansionary ﬁscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending
Will

Accepted Answer

The crowding-out effect suggests that when the government increases its spending, it leads to an increase in interest rates in order to borrow money. This increase in interest rates makes it more expensive for businesses and individuals to borrow money for investment purposes, which results in decreased investment spending. Therefore, in this case, the adoption of expansionary fiscal policy by Congress would lead to a decrease in investment spending, thus partially offsetting the fiscal policy.

Question 10

Most economists believe that ﬁscal policy is

Accepted Answer

Fiscal policy involves changes in government spending and taxation, which can take time to implement and may have unintended consequences. In contrast, monetary policy can be used more quickly and effectively to stabilize the economy on a month-to-month basis. However, fiscal policy can be useful in addressing long-term economic issues and can be used to push the economy in a particular direction.

Question 11

Assume that if there were no crowding out, an increase in government spending would increase GDP by $100 billion. On the other hand, if there had been full crowding out, then GDP would have

Accepted Answer

Full crowding out implies that the increase in government spending is completely offset by a decrease in private sector spending, resulting in no net change in GDP.

Question 12

One timing problem in using ﬁscal policy to counter a recession is the "recognition lag" that occurs between the

Accepted Answer

The recognition lag refers to the delay between the onset of a recession and when policymakers recognize that the recession has begun, impacting the timing of fiscal policy responses.

Question 13

Proponents of the notion of a "political business cycle" suggest that

Accepted Answer

Proponents of the political business cycle argue that policymakers use fiscal policy to manipulate the economy in order to enhance their chances of reelection. This can lead to economic fluctuations that are timed to coincide with elections. Thus, C is the correct choice. A, B and D do not accurately reflect this view.

Question 14

From 2010 to 2015, the actual as well as the cyclically adjusted federal budget deﬁcits as percentages of GDP in the U.S.

Accepted Answer

From 2010 to 2015, both the actual and cyclically adjusted federal budget deficits decreased as percentages of GDP in the U.S.

Question 15

One timing problem in using ﬁscal policy to counter a recession is the "operational lag" that occurs between the

Accepted Answer

The operational lag refers to the time it takes for fiscal policy actions to have their intended effect on the economy. This lag can be quite long, sometimes taking several quarters or even years to fully manifest. Therefore, even if policymakers recognize the need for fiscal action promptly, passing legislation and implementing the measures will take time, and then there is further time required for the economy to respond.

Question 16

State and local governments are limited in their ability to respond to recessions because of

Accepted Answer

State and local governments are limited in their ability to respond to recessions because they are required by constitutional and other mandates to balance their budgets. This means that they cannot engage in deficit spending or borrow large amounts of money to fund programs and initiatives aimed at stimulating the economy during a recession. This can limit the options available to state and local governments when trying to respond to economic downturns.

Question 17

The crowding-out effect works through interest rates, and it tends to

Accepted Answer

The crowding-out effect refers to the decrease in private investment that occurs when government borrowing increases, causing interest rates to rise. Higher interest rates discourage private investment since borrowing becomes more expensive. As a result, the effectiveness of an increase in government spending is decreased because it crowds out potential private investment. Therefore, option C is the best choice.

Question 18

A procyclical ﬁscal policy, like those of many state and local governments in the United States, tends to

Accepted Answer

Procyclical fiscal policies exacerbate economic fluctuations by increasing spending or cutting taxes during boom times, which can worsen inflation, and by reducing spending or increasing taxes during recessions, which can deepen the downturn.

Question 19

If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

Accepted Answer

If there is a constitutional requirement to maintain a balanced budget, the government cannot engage in deficit spending. During a recession, tax revenues decline, which would result in a budget deficit if the government were to continue spending at the same level. Therefore, the government would have to implement contractionary fiscal policy, such as reducing government spending or increasing taxes, to balance the budget.

Question 20

If people expected that a ﬁscal policy in the form of a tax cut was temporary, then this policy's effect on the economy would tend to be

Accepted Answer

If people expect a tax cut to be temporary, they may not alter their behavior much as they anticipate the tax cut will end soon. This means that the impact of the tax cut on the economy is likely to be weaker than if people believed it to be permanent.

Quiz 13: Fiscal Policy, Deficits, and Debt