Question 1

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 demand, which can help lower inflationary pressures.

Question 2

If an economy is in an equilibrium with an inflationary gap, policy-makers can use

Accepted Answer

If an economy is in equilibrium with an inflationary gap, it means that the current level of output is higher than the potential output, causing an increase in prices. In this case, discretionary fiscal policy can be used to decrease government expenditure to reduce aggregate demand, which would lower prices and bring the economy back to equilibrium. Cutting taxes or increasing government expenditure could further exacerbate the inflationary gap. Automatic fiscal policy, by definition, does not involve discretionary action by policy-makers, so it is not a suitable option in this case.

Question 3

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 should increase government expenditures on goods and services or decrease taxes. This will increase aggregate demand, leading to an increase in output and a decrease in unemployment. Option A, increase in government expenditures and taxes, would not be effective as it may not increase aggregate demand if the increase in taxes reduces disposable income. Option C, decrease in government expenditures and an increase in taxes, will further decrease aggregate demand worsening the recession. Option D, decrease in government expenditures and taxes, will not increase aggregate demand. Option E, increase in government expenditures only, may not be effective as it may cause an increase in prices (inflation) without necessarily increasing output.

Question 4

Automatic stabilizers are defined as

Accepted Answer

Automatic stabilizers are policies or features of the economy that automatically work to stabilize the economy without any additional government action. Examples include unemployment benefits, which automatically increase during a recession and provide a safety net for those who have lost their jobs, and progressive income taxes, which automatically decrease during a recession as incomes fall. These policies work to stabilize the economy without the need for discretionary government action.

Question 5

If the economy is in 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

The answer of If the economy is in an equilibrium...

Question 6

-If an economy is at the short-run equilibrium illustrated by the figure above, a discretionary fiscal policy to adjust the economy to full employment is to

Accepted Answer

The answer of 
-If an economy is at the short-run...

Question 7

A decrease in taxes should be applied in a situation with

Accepted Answer

A decrease in taxes can help to stimulate demand in an economy that is experiencing a recessionary gap, where there is a lack of spending which is causing a decrease in overall economic activity. By reducing taxes, consumers and businesses will have more money to spend, which can help to increase demand for goods and services, and ultimately help to restore economic growth.

Question 8

If the economy has been producing at a point where real GDP is less than potential GDP, what fiscal policy can the federal government use to restore real GDP to potential GDP?

Accepted Answer

Cutting taxes would result in increased disposable income for consumers, which would lead to an increase in consumption spending and aggregate demand. This would shift the aggregate demand curve to the right, leading to an increase in real GDP.

Question 9

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 answer of Ignoring any supply-side effects, to close a...

Question 10

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

The answer of If the economy is in equilibrium with...

Question 11

-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 increase

Accepted Answer

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

Question 12

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

Accepted Answer

A fiscal stimulus involves increasing government spending, lowering taxes, or increasing transfer payments to stimulate economic growth. Option D, the decrease in taxes, is an example of a fiscal stimulus as it would increase disposable income and encourage consumer spending, ultimately stimulating the economy. The other options are examples of fiscal contraction, which would have the opposite effect on the economy.

Question 13

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

Accepted Answer

The government expenditure multiplier of 5 means that a $1 change in government spending results in a $5 change in GDP. To close a $100 billion gap, the government should decrease spending by $20 billion ($20 billion x 5 = $100 billion).

Question 14

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 will increase disposable income and incentivize consumption, which will increase aggregate demand and help stimulate economic growth.

Question 15

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

Accepted Answer

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

Question 16

Suppose the economy is in 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

The government can use a combination of decreasing taxes and/or increasing government expenditure, referred to as fiscal stimulus, to increase real GDP when it is below its potential. Decreasing taxes puts more money in consumers' pockets, which increases their spending and demand for goods and services, leading to higher output levels. Similarly, increasing government expenditure increases demand for goods and services, leading to higher output levels. A decrease in government expenditure alone may lead to a decrease in output levels, while increasing taxes may lead to a decrease in disposable income and a subsequent decrease in consumer spending, both leading to lower output levels. Therefore, the best choice in this situation is to use a fiscal stimulus by decreasing taxes and/or increasing government expenditure.

Question 17

When an economy faces an inflationary gap, an appropriate fiscal policy is to

Accepted Answer

When an economy faces an inflationary gap, it means that the aggregate demand is exceeding the potential output capacity of the economy, leading to high inflation. To control this inflation, the government needs to decrease its spending, which will reduce the aggregate demand and bring it back in line with the potential output level. Hence, the appropriate fiscal policy in this case is to decrease government expenditure.

Question 18

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

Accepted Answer

Increasing taxes reduces disposable income, leading to decreased consumption and aggregate demand, which helps close an inflationary gap.

Question 19

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

Accepted Answer

If government expenditure on goods and services decrease by $10 billion and taxes decrease by $10 billion, then there will be a decrease in aggregate demand as consumers will have less disposable income to spend. This will lead to a decrease in real GDP. Additionally, with a decrease in demand, prices will fall because businesses will lower prices to attract buyers, resulting in a decrease in the price level.

Question 20

Ignoring any supply-side effects, when taxes are hiked, real GDP ________ and the price level ________.

Accepted Answer

When taxes are hiked, disposable income decreases, leading to a decrease in aggregate demand. This, in turn, leads to a decrease in real GDP. As aggregate demand decreases, the price level also falls.

Quiz 16: Fiscal Policy