Question 1

Suppose Political Party A proposes a tax cut on business income to stimulate the economy.Political Party B opposes the tax cut on business income asserting that it would only help businesses,not the average working man and woman.If you were hired as an economist for Political Party A,explain how the tax cut on business income would help the average working man and woman.

Accepted Answer

The answer of Suppose Political Party A proposes a tax...

Question 2

The multiplier effect following an increase in expenditure is generated by induced increases in consumption expenditure as income rises.

Accepted Answer

The multiplier effect is generated by induced increases in consumption expenditure as income rises. This leads to further rounds of expenditure and income increases.

Question 3

The crowding out of private spending by government spending will be greater the

Accepted Answer

The crowding out effect occurs when government spending increases, causing interest rates to rise and decreasing private consumption, investment, and net exports as a result. If these private components of spending are more sensitive to changes in interest rates, then the crowding out effect will be greater. Therefore, option B is the correct answer.

Question 4

Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have to do with the government purchases multiplier?

Accepted Answer

The answer of Why would a higher tax rate lower...

Question 5

The use of fiscal policy to stabilize the economy is limited because

Accepted Answer

The legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way. This can limit the effectiveness of fiscal policy as an economic stabilization tool.

Question 6

Explain why the tax multiplier is different from the government purchases multiplier,in both sign and relative magnitude.

Accepted Answer

The answer of Explain why the tax multiplier is different...

Question 7

What economic impact would the closing of a nearby military base have on a town? Would people and businesses that did not directly deal with the military personnel be affected?

Accepted Answer

The answer of What economic impact would the closing of...

Question 8

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because

Accepted Answer

The Federal Reserve can use monetary policy tools, such as adjusting interest rates, to quickly respond to changes in the economy. Congress and the president, on the other hand, must go through a longer legislative process to change fiscal policy, such as government spending or taxes. The Federal Reserve's ability to act quickly gives them a larger role in stabilizing the economy.

Question 9

Describe the differences (in sign and relative magnitude)between the government purchases multiplier and the tax multiplier.

Accepted Answer

The answer of Describe the differences (in sign and relative...

Question 10

Suppose real GDP is $13 trillion and potential real GDP is $13.5 trillion.If Congress and the president increase government purchases by $500 billion,then the economy will be brought to equilibrium at potential real GDP.

Accepted Answer

The increase in government purchases may stimulate economic growth, but it is unlikely to bring the economy to potential GDP if there are other factors, such as a lack of investment, low productivity, or high unemployment, holding back the economy. The statement oversimplifies the complex dynamics of the economy.

Question 11

An increase in the sensitivity of private spending (consumption,investment,and net exports)to changes in the interest rate ________ the government purchases multiplier.

Accepted Answer

An increase in the sensitivity of private spending to changes in the interest rate means that when interest rates change, private spending will change more significantly. This means that the government purchases multiplier will decrease because the increase in private spending will offset the effect of government purchases on overall spending. Therefore, Choice A is the correct answer.

Question 12

In the case of an upward-sloping aggregate supply curve,the change in real GDP brought about by a change in government spending will be less than that predicted by the simple government purchases multiplier.

Accepted Answer

An upward-sloping aggregate supply curve implies that as output increases, costs and prices also increase. This means that an increase in governmental spending will lead to an increase in costs and prices, which will reduce the effect of the multiplier on real GDP. Therefore, the change in real GDP brought about by a change in government spending will be less than that predicted by the simple government purchases multiplier.

Question 13

Crowding out refers to a decline in ________ as a result of an increase in ________.

Accepted Answer

Crowding out occurs when increased government spending leads to a reduction in private sector spending. This happens because government borrowing to finance its expenditures can lead to higher interest rates, which in turn discourages private investment.

Question 14

The tax multiplier is calculated as "one minus the government purchases multiplier."

Accepted Answer

The tax multiplier is calculated as "minus the government purchases multiplier divided by the marginal propensity to consume plus the government purchases multiplier."

Question 15

If real GDP is $300 billion below potential GDP and the tax multiplier equals -1.5,then how much would the government need to change taxes to bring the economy to equilibrium at potential?

Accepted Answer

The answer of If real GDP is $300 billion below...

Question 16

A tax rebate,which is expected to be offered in this and all future years,will

Accepted Answer

The answer of A tax rebate,which is expected to be...

Question 17

Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion.If the president and the Congress increased government purchases by $500 billion,what would be the result on the economy?

Accepted Answer

The answer of Suppose real GDP is currently $12.5 trillion...

Question 18

If government increases taxes by the same amount it increases government spending,there will be no effect on aggregate demand: the increase in government spending is offset by an equal decrease in consumption spending by households.

Accepted Answer

If government increases taxes by the same amount it increases government spending, there will still be a net increase in government spending which will lead to an increase in aggregate demand, but the overall effect may be less than if the government only increased spending without also increasing taxes. Additionally, the impact on consumption spending by households may not necessarily be equal to the increase in government spending, as some households may simply save their extra money rather than decrease consumption spending.

Question 19

Suppose that the current equilibrium GDP is $14.5 trillion and that potential GDP is $14.3 trillion.Will decreasing government purchases by $200 billion,or raising taxes by $200 billion,restore the economy to potential GDP? Explain.

Accepted Answer

The answer of Suppose that the current equilibrium GDP is...

Question 20

In absolute value,the tax multiplier is greater than the government purchases multiplier.

Accepted Answer

The government purchases multiplier is typically larger in absolute value than the tax multiplier because every dollar of government spending directly increases aggregate demand by the full amount, while tax cuts indirectly affect aggregate demand through the increase in household disposable income, part of which may be saved rather than spent.

Quiz 18: Fiscal Policy