Question 1

Fiscal policy may be mistimed due to

Accepted Answer

Fiscal policy may have an impact lag, meaning that the effects of the policy may not be realized until some time after it has been implemented. This lag can cause the policy to be mistimed in relation to economic conditions, leading to unintended consequences. The other choices (A and B) are not relevant to the potential mistiming of fiscal policy.

Question 2

Congress is debating whether to raise taxes by $100 billion or decrease spending by $100 billion in order to eliminate a budget deficit. Which action will have the larger effect on equilibrium GDP?

Accepted Answer

The decrease in spending will have a larger effect on equilibrium GDP as it directly affects aggregate demand. Taxes, on the other hand, may also have a negative effect on aggregate demand as it reduces disposable income but may also have a positive effect on the supply side through incentives for investment and work. However, the actual effect can only be determined with knowledge of the multiplier.

Question 3

An automatic stabilizer is a feature of the economy that

Accepted Answer

An automatic stabilizer is a feature of the economy that helps reduce its sensitivity to shocks such as changes in economic activity, production levels, or employment rates. This helps to smooth out the ups and downs of the business cycle and reduce the severity of recessions or expansions. Automatic stabilizers can include mechanisms such as unemployment insurance, progressive income taxes, and welfare programs that automatically increase during economic downturns and decrease during economic expansions.

Question 4

Tax and spending policies affect aggregate demand only after some time elapses. Due to these time lags, fiscal policies end up getting based on

Accepted Answer

Tax and spending policies take time to implement and have an impact on the economy. Therefore, fiscal policies are often based on forecasts of the future state of the economy. However, these forecasts are often inaccurate due to the complexity of the economy and the difficulty in predicting future events accurately.

Question 5

How will a cut in a fixed tax affect the consumption schedule?

Accepted Answer

A cut in a fixed tax would increase disposable income, resulting in an increase in consumption at every level of income. This would shift the consumption schedule upward.

Question 6

Changes in government spending

Accepted Answer

Changes in government spending are a direct component of the expenditures schedule and have the same multiplier effect as changes in business investment spending. Both types of spending directly impact GDP and lead to a multiplier effect as the initial spending triggers further spending throughout the economy. Matching changes in government spending with tax changes may affect the distribution of spending among individuals or sectors, but it does not negate the impact on overall spending and GDP.

Question 7

The oversimplified formula for the multiplier is misleading because it ignores the effects of

Accepted Answer

The oversimplified formula for the multiplier only takes into account changes in government spending and investment and does not consider other important factors such as price-level changes, the foreign sector, and variable taxes. Therefore, all of the above options are correct and should be considered when determining the true impact of government spending and investment on the economy.

Question 8

If the government decides to change the level of government spending, what happens to the value of the multiplier?

Accepted Answer

The value of the multiplier is determined by the marginal propensity to consume and save, not directly by the level of government spending. Therefore, a change in government spending does not alter the value of the multiplier itself.

Question 9

Which of the following is one of the main features of our modern economy that helps ensure against a repeat performance of the Great Depression?

Accepted Answer

The answer of Which of the following is one of...

Question 10

Suppose that the U.S. personal income tax was eliminated and replaced with a fixed tax that raised the exact same amount of revenue. The multiplier would be

Accepted Answer

Eliminating the U.S. personal income tax and replacing it with a fixed tax that raises the same amount of revenue would likely increase the multiplier. This is because a fixed tax is less progressive than the current income tax system, meaning it would likely reduce the marginal propensity to consume less across different income levels, leading to a larger multiplier effect on the economy.

Question 11

Unemployment insurance is an example of

Accepted Answer

Unemployment insurance is an automatic stabilizer because it provides income support to individuals during times of economic downturns, helping to stabilize their consumption and therefore boost aggregate demand. This helps to offset the impact of recessions and contribute to economic stability. Unemployment insurance is not a tax, although it is typically funded through payroll taxes.

Question 12

The president wishes not only to increase spending for education by $4 billion but also to maintain a balanced budget. Therefore, taxes will also be increased by $4 billion. What will happen to GDP?

Accepted Answer

The answer of The president wishes not only to increase...

Question 13

President Clinton, at the beginning of his administration, increased personal income taxes on individuals with relatively high incomes. How will this change the consumption schedule?

Accepted Answer

The answer of President Clinton, at the beginning of his...

Question 14

A change in a fixed tax will cause the consumption schedule to

Accepted Answer

A change in a fixed tax will cause the consumption schedule to shift in a parallel manner. This means that at every level of income, consumption will either increase or decrease by the same amount due to the change in tax. The slope or steepness of the consumption schedule will remain the same.

Question 15

An increase in taxes will cause the consumption schedule to

Accepted Answer

When taxes increase, consumers have less disposable income to spend on goods and services. This leads to a decrease in consumption at all levels of income, causing the consumption schedule to shift downward.

Question 16

When the economy has an income tax that is variable, the multiplier is

Accepted Answer

When the income tax is variable, it means that as income increases, the tax rate also increases. This reduces the amount of disposable income available for consumption, thereby reducing the multiplier effect and making it smaller. Therefore, the correct choice is C, smaller.

Question 17

As a result of the recent financial crisis, some analysts believed that the MPC in the U.S. declined. If this is true, the value of the multiplier is now

Accepted Answer

The MPC (Marginal Propensity to Consume) refers to the portion of each additional dollar of income that a consumer spends on goods and services. If the MPC has declined, it means that consumers are spending less of their income and saving more. This could be a result of a decrease in consumer confidence or a shift towards more cautious spending habits due to the financial crisis.

When the MPC is smaller, the value of the multiplier is also smaller. The multiplier refers to the amount by which a change in spending (or investment) will affect the overall economy. A smaller MPC means that each dollar of spending will have a smaller impact on the economy, leading to a smaller multiplier. Therefore, the value of the multiplier is now smaller.

Question 18

In an effort to balance the budget, the government cuts spending rather than increasing taxes. What will happen to the consumption schedule?

Accepted Answer

When the government cuts spending to balance the budget, it reduces the overall demand in the economy. This leads to a decrease in income and, consequently, a decrease in consumption. Therefore, the consumption schedule will shift downward, reflecting lower levels of consumption at each level of income.

Question 19

In order to maintain a balanced budget, Congress has decided to cut taxes and government spending both by $25 billion. What will happen to GDP?

Accepted Answer

Cutting both taxes and government spending will lead to a decrease in aggregate demand in the economy. This decrease in demand will lead to a decrease in GDP.

Question 20

How does the multiplier for a change in government spending compare to the multiplier for a change in taxes?

Accepted Answer

The multiplier for a change in government spending is larger than the multiplier for a change in taxes. This is because when the government increases spending, it injects money directly into the economy, which then circulates through multiple rounds of spending, leading to an overall increase in economic activity. On the other hand, when the government decreases taxes, individuals and firms might use the extra money to save or pay down debt instead of spending it, which limits the effect on economic activity. Therefore, the multiplier effect of government spending is generally larger than the multiplier effect of tax changes.

Quiz 27: Managing Aggregate Demand: Fiscal Policy