Question 1

An economy is at a short-run equilibrium as illustrated in the above figure.An appropriate fiscal policy option to move the economy to full employment is to

Accepted Answer

The answer of 
An economy is at a short-run equilibrium...

Question 2

If the economy is in equilibrium with real GDP less than potential GDP,there is ________ gap,and a fiscal policy that ________ is appropriate.

Accepted Answer

If the economy is in equilibrium with real GDP less than potential GDP, then it is a recessionary gap. To close this gap, we need to increase aggregate demand, and thus, a fiscal policy that increases aggregate demand is appropriate. Options A and B suggest decreasing potential GDP or decreasing aggregate demand, respectively, which would be counterproductive in this situation. Option C suggests an inflationary gap, which is not the situation described in the question. Therefore, option D is the best choice.

Question 3

Ignoring any supply-side effects,to close a recessionary gap of $100 billion with a government expenditure multiplier of 5,the government could

Accepted Answer

The government expenditure multiplier of 5 means that every dollar spent by the government increases the total economic output by 5 dollars. To close a $100 billion gap, the government needs to increase spending by $20 billion, as $20 billion x 5 = $100 billion.

Question 4

The balanced budget multiplier applies when a $50 billion increase in government expenditure is financed by a $50 billion ________ in tax revenue and the balanced budget multiplier shows that in this case there is ________ effect on aggregate demand.

Accepted Answer

The balanced budget multiplier indicates that an equal increase in government spending and taxes leads to a positive effect on aggregate demand, as the increase in government spending has a direct impact, while the tax increase has a smaller indirect effect.

Question 5

Ignoring any supply-side effects,if government expenditure on goods and services decreases by $10 billion and taxes decrease by $10 billion,then real GDP ________ and the price level ________.

Accepted Answer

The answer of Ignoring any supply-side effects,if government expenditure on...

Question 6

If an economy is at an equilibrium with an inflationary gap,policymakers can use

Accepted Answer

When an economy is at equilibrium with an inflationary gap, it means that the level of output is above the economy's potential output and there is upward pressure on prices due to excess demand. In this situation, policymakers can use discretionary fiscal policy to decrease government expenditure, which would reduce aggregate demand and bring the economy back to potential output with lower inflation. Automatic fiscal policy cannot be used in this situation as it is activated by changes in the economy, not policymakers. Cutting taxes or increasing government expenditure through discretionary policy would only exacerbate the inflationary gap.

Question 7

Which of the following is a limitation of discretionary fiscal policy?
i.The legislation time lag
ii.Estimating potential GDP
iii.The income gap

Accepted Answer

The limitation of discretionary fiscal policy includes the legislation time lag, which refers to the time taken to enact changes in fiscal policy, and estimating potential GDP, which is difficult to determine accurately. The income gap is not a limitation of discretionary fiscal policy, but rather a broader economic issue. Therefore, options i and ii are the limitations of discretionary fiscal policy. Thus, D is the correct choice as it includes both i and ii only.

Question 8

In order to help the economy recover from a recession using fiscal policy,the government can ________ so that aggregate demand increases.

Accepted Answer

Cutting taxes can increase disposable income and therefore increase consumption, leading to an increase in aggregate demand. This can help stimulate economic growth and recovery. Cutting government expenditure on goods and services (choice A) would actually decrease aggregate demand, which could worsen a recession. Raising taxes (choice B) would decrease disposable income and consumption, also potentially worsening a recession. Raising interest rates (choice D) and decreasing the quantity of money (choice E) are both monetary policy tools rather than fiscal policy tools.

Question 9

In order to reduce inflationary pressure on the economy,what fiscal policy can the government use?

Accepted Answer

Raising taxes can reduce consumer spending and aggregate demand, which can help to lower inflationary pressures in the economy.

Question 10

Suppose the economy is at an equilibrium in which real GDP is less than potential GDP.To increase real GDP,the government can use a fiscal stimulus of

Accepted Answer

To increase real GDP, the government can implement a fiscal stimulus, which involves increasing government expenditure and/or decreasing taxes. This can lead to an increase in aggregate demand, as consumers and businesses have more money to spend and invest. Decreasing government expenditure or increasing taxes would have the opposite effect, reducing aggregate demand and potentially deepening the recession. Increasing the quantity of money (i.e. monetary stimulus) could also increase aggregate demand, but that is not the question being asked here. Therefore, E is the best choice.

Question 11

If the government uses fiscal policy to close a recessionary gap,

Accepted Answer

The answer of If the government uses fiscal policy to...

Question 12

The figure above shows a nation's aggregate demand curve,aggregate supply curve,and potential GDP.
-In the figure above,the ________ gap is one trillion dollars.To close the gap,the government can change expenditure by ________ one trillion dollars.

Accepted Answer

The answer of  
The figure above shows a nation's...

Question 13

The figure above shows a nation's aggregate demand curve,aggregate supply curve,and potential GDP.
-In the figure above,the ________ gap is one trillion dollars.To close the gap,the government can ________ government expenditure and/or ________ taxes.

Accepted Answer

The gap described is a recessionary gap, which occurs when an economy's actual output is less than its potential output. To close this gap, the government can increase government expenditure to stimulate demand and/or decrease taxes to increase disposable income and consumption, thereby stimulating economic activity.

Question 14

To eliminate an inflationary gap using fiscal policy,the government could

Accepted Answer

Increasing taxes reduces disposable income, leading to decreased consumer spending, which can help close an inflationary gap by reducing aggregate demand.

Question 15

The use of discretionary fiscal policy is hampered by i.the difficulty of estimating the level of potential GDP.
Ii)the lack of accuracy of economic forecasts.
Iii)the shrinking area of Parliamentary discretion.

Accepted Answer

Option i states that the use of discretionary fiscal policy is hampered by the difficulty of estimating the level of potential GDP, which refers to the difficulty in determining the level of output the economy could produce if resources were fully employed. This poses a challenge when fiscal policymakers attempt to determine the appropriate level of government spending, taxes, and borrowing.

Option ii states that the lack of accuracy of economic forecasts is a challenge to the use of discretionary fiscal policy. Fiscal policymakers often rely on economic forecasts to predict future economic conditions and determine the appropriate course of action. However, these forecasts are often subject to errors and inaccuracies, which can lead to policy mistakes.

Option iii states that the shrinking area of Parliamentary discretion is a challenge to using discretionary fiscal policy. As governments have delegated more responsibility to independent bodies such as central banks, there is less scope for Parliaments to use fiscal policy tools to influence the economy.

All three of these factors pose significant challenges to the use of discretionary fiscal policy, and therefore the correct answer is E, i.e., all of the above.

Question 16

If government expenditure increases by $200 billion and taxes simultaneously increase by $200 billion,then aggregate demand

Accepted Answer

The multiplier effect of government spending typically exceeds that of a tax increase, leading to an overall increase in aggregate demand even when both are increased by the same amount.

Question 17

If the economy is at an equilibrium with real GDP less than potential GDP,a fiscal stimulus could move the economy toward potential GDP by simultaneously ________ taxes and ________ government expenditures on goods and services.

Accepted Answer

Fiscal stimulus involves government actions to increase economic activity, typically through cutting taxes (which increases consumers' disposable income and encourages spending) and increasing government expenditures on goods and services (which directly injects money into the economy), both of which can help move the economy toward its potential GDP.

Question 18

To eliminate a recessionary gap,the government can ________ government expenditures on goods and services or ________ taxes.

Accepted Answer

To eliminate a recessionary gap, the government needs to increase aggregate demand. One way to do that is by increasing government expenditures on goods and services. Another way is to decrease taxes, as this would increase disposable income, leading to an increase in consumption spending. Therefore, the correct choice is to increase government expenditures on goods and services or decrease taxes, which is option D.

Question 19

Ignoring any supply-side effects,if government expenditure on goods and services increases by $10 billion and taxes increase by $10 billion,then real GDP ________ and the price level ________.

Accepted Answer

When government expenditure increases by $10 billion, it directly increases aggregate demand, leading to an increase in real GDP. The increase in taxes by $10 billion reduces disposable income, but the overall effect is an increase in aggregate demand because the government spending multiplier is typically larger than the tax multiplier. This results in an increase in the price level as well.

Question 20

Which of the following is an example of a fiscal stimulus?

Accepted Answer

A fiscal stimulus involves increasing government spending or reducing taxes in order to stimulate economic growth. Option B involves a decrease in taxes, which would leave more money in the hands of consumers and businesses to spend and invest, potentially leading to an increase in aggregate demand and economic activity. The other options involve decreases in government spending or transfers, which would have the opposite effect of a fiscal stimulus.

Quiz 14: Fiscal Policy

An economy is at a short-run equilibrium as illustrated in the above figure.An appropriate fiscal policy option to move the economy to full employment is to

If the economy is in equilibrium with real GDP less than potential GDP,there is gap,and a fiscal policy that is appropriate.

Ignoring any supply-side effects,to close a recessionary gap of $100 billion with a government expenditure multiplier of 5,the government could

The balanced budget multiplier applies when a $50 billion increase in government expenditure is financed by a $50 billion in tax revenue and the balanced budget multiplier shows that in this case there is effect on aggregate demand.

Ignoring any supply-side effects,if government expenditure on goods and services decreases by $10 billion and taxes decrease by $10 billion,then real GDP and the price level .

If an economy is at an equilibrium with an inflationary gap,policymakers can use

Which of the following is a limitation of discretionary fiscal policy? i.The legislation time lag ii.Estimating potential GDP iii.The income gap

In order to help the economy recover from a recession using fiscal policy,the government can ________ so that aggregate demand increases.

In order to reduce inflationary pressure on the economy,what fiscal policy can the government use?

Suppose the economy is at an equilibrium in which real GDP is less than potential GDP.To increase real GDP,the government can use a fiscal stimulus of

If the government uses fiscal policy to close a recessionary gap,

The figure above shows a nation's aggregate demand curve,aggregate supply curve,and potential GDP. -In the figure above,the gap is one trillion dollars.To close the gap,the government can change expenditure by one trillion dollars.

The figure above shows a nation's aggregate demand curve,aggregate supply curve,and potential GDP. -In the figure above,the gap is one trillion dollars.To close the gap,the government can government expenditure and/or taxes.

To eliminate an inflationary gap using fiscal policy,the government could

The use of discretionary fiscal policy is hampered by i.the difficulty of estimating the level of potential GDP. Ii) the lack of accuracy of economic forecasts. Iii) the shrinking area of Parliamentary discretion.

If government expenditure increases by $200 billion and taxes simultaneously increase by $200 billion,then aggregate demand

If the economy is at an equilibrium with real GDP less than potential GDP,a fiscal stimulus could move the economy toward potential GDP by simultaneously taxes and government expenditures on goods and services.

To eliminate a recessionary gap,the government can government expenditures on goods and services or taxes.

Ignoring any supply-side effects,if government expenditure on goods and services increases by $10 billion and taxes increase by $10 billion,then real GDP and the price level .

Which of the following is an example of a fiscal stimulus?

Quiz 14: Fiscal Policy

An economy is at a short-run equilibrium as illustrated in the above figure.An appropriate fiscal policy option to move the economy to full employment is to

If the economy is in equilibrium with real GDP less than potential GDP,there is ________ gap,and a fiscal policy that ________ is appropriate.

Ignoring any supply-side effects,to close a recessionary gap of $100 billion with a government expenditure multiplier of 5,the government could

The balanced budget multiplier applies when a $50 billion increase in government expenditure is financed by a $50 billion ________ in tax revenue and the balanced budget multiplier shows that in this case there is ________ effect on aggregate demand.

Ignoring any supply-side effects,if government expenditure on goods and services decreases by $10 billion and taxes decrease by $10 billion,then real GDP ________ and the price level ________.

If an economy is at an equilibrium with an inflationary gap,policymakers can use

Which of the following is a limitation of discretionary fiscal policy? i.The legislation time lag ii.Estimating potential GDP iii.The income gap

In order to help the economy recover from a recession using fiscal policy,the government can ________ so that aggregate demand increases.

In order to reduce inflationary pressure on the economy,what fiscal policy can the government use?

Suppose the economy is at an equilibrium in which real GDP is less than potential GDP.To increase real GDP,the government can use a fiscal stimulus of

If the government uses fiscal policy to close a recessionary gap,

The figure above shows a nation's aggregate demand curve,aggregate supply curve,and potential GDP. -In the figure above,the ________ gap is one trillion dollars.To close the gap,the government can change expenditure by ________ one trillion dollars.

The figure above shows a nation's aggregate demand curve,aggregate supply curve,and potential GDP. -In the figure above,the ________ gap is one trillion dollars.To close the gap,the government can ________ government expenditure and/or ________ taxes.

To eliminate an inflationary gap using fiscal policy,the government could

The use of discretionary fiscal policy is hampered by i.the difficulty of estimating the level of potential GDP. Ii) the lack of accuracy of economic forecasts. Iii) the shrinking area of Parliamentary discretion.

If government expenditure increases by $200 billion and taxes simultaneously increase by $200 billion,then aggregate demand

If the economy is at an equilibrium with real GDP less than potential GDP,a fiscal stimulus could move the economy toward potential GDP by simultaneously ________ taxes and ________ government expenditures on goods and services.

To eliminate a recessionary gap,the government can ________ government expenditures on goods and services or ________ taxes.

Ignoring any supply-side effects,if government expenditure on goods and services increases by $10 billion and taxes increase by $10 billion,then real GDP ________ and the price level ________.

Which of the following is an example of a fiscal stimulus?

If the economy is in equilibrium with real GDP less than potential GDP,there is gap,and a fiscal policy that is appropriate.

The balanced budget multiplier applies when a $50 billion increase in government expenditure is financed by a $50 billion in tax revenue and the balanced budget multiplier shows that in this case there is effect on aggregate demand.

Ignoring any supply-side effects,if government expenditure on goods and services decreases by $10 billion and taxes decrease by $10 billion,then real GDP and the price level .

The figure above shows a nation's aggregate demand curve,aggregate supply curve,and potential GDP. -In the figure above,the gap is one trillion dollars.To close the gap,the government can change expenditure by one trillion dollars.

The figure above shows a nation's aggregate demand curve,aggregate supply curve,and potential GDP. -In the figure above,the gap is one trillion dollars.To close the gap,the government can government expenditure and/or taxes.

If the economy is at an equilibrium with real GDP less than potential GDP,a fiscal stimulus could move the economy toward potential GDP by simultaneously taxes and government expenditures on goods and services.

To eliminate a recessionary gap,the government can government expenditures on goods and services or taxes.

Ignoring any supply-side effects,if government expenditure on goods and services increases by $10 billion and taxes increase by $10 billion,then real GDP and the price level .