Question 1

When aggregate demand is high enough to drive unemployment below the natural rate:

Accepted Answer

If aggregate demand is high enough to drive unemployment below the natural rate, it means that the economy is operating above potential output. This leads to a shortage of labor and other resources, which results in upward pressure on the price level. To combat inflation, the government may want to conduct contractionary fiscal policy, such as reducing government spending or raising taxes, to decrease aggregate demand and bring the economy back to its long-run equilibrium.

Question 2

The Economic Stimulus Act of 2008 focused on _________,whereas the American Recovery and Reinvestment Act of 2009 focused on _________.

Accepted Answer

The answer of The Economic Stimulus Act of 2008 focused...

Question 3

When the government decreases spending or increases taxes to slow economic expansion,the government is conducting:

Accepted Answer

When the government decreases spending or increases taxes to slow economic expansion, it is conducting contractionary fiscal policy.

Question 4

Fiscal policy that seeks to counteract business-cycle fluctuations is:

Accepted Answer

Countercyclical fiscal policy is the best choice as it refers to government policies designed to reduce the severity of business cycles. When the economy experiences a downturn, countercyclical policies (such as increased government spending and tax cuts) aim to stimulate aggregate demand and economic growth. When the economy is experiencing inflationary pressures, countercyclical policies (such as decreased government spending and tax increases) aim to reduce aggregate demand and stabilize prices.

Question 5

An increase in taxes or a decrease in spending during an economic expansion can:

Accepted Answer

During an economic expansion, tax revenues increase as incomes and profits rise. Therefore, increasing taxes or decreasing spending can help decrease the budget deficit, as the government is receiving more revenue than it needs to spend. If the deficit is decreased, this can lead to the government paying off some of its debt. Therefore, choice B is the best option.

Question 6

Expansionary fiscal policy leads to:

Accepted Answer

Expansionary fiscal policy involves increasing government spending and/or decreasing taxes, which leads to an increase in the budget deficit and national debt during economic downturns. This is because the government is spending more money to stimulate the economy, and the increased spending is not offset by an increase in tax revenue due to lower economic activity.

Question 7

During economic expansions:

Accepted Answer

The answer of During economic expansions:
...

Question 8

Assume that the government is currently balancing the national budget so that outlays equal tax revenue.Then the economy slips into recession,and the government decides to increase government spending by $50 billion.The government must pay for this by borrowing; it must sell $50 billion worth of Treasury bonds.As a result:

Accepted Answer

When the government increases its spending, it must sell bonds to finance the expenditure. This results in an increase in the federal deficit, which means that outlays exceed tax revenue. The deficit will be equal to the amount of borrowing, which is $50 billion in this case. Therefore, the federal budget will be in deficit by at least $50 billion.

Question 9

If the unemployment rate falls below the natural rate of unemployment (u*):

Accepted Answer

The answer of If the unemployment rate falls below the...

Question 10

The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 are both examples of:

Accepted Answer

Both the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 involved increased government spending and tax cuts with the intent of stimulating economic growth, which is an example of expansionary fiscal policy.

Question 11

Which of the following would be the theoretical outcome of contractionary fiscal policy in the following aggregate demand-aggregate supply model,where LRAS is long-run aggregate supply and SRAS is short-run aggregate supply?

Accepted Answer

The answer of Which of the following would be the...

Question 12

A government might want to reduce aggregate demand if it believes that:

Accepted Answer

If the government believes that the economy is expanding past its long-run capabilities, it may want to reduce aggregate demand to prevent overheating and inflation. This is because sustained economic growth beyond the long-run potential output can cause prices to rise too quickly, leading to inflationary pressures. The other options do not necessarily provide a clear case for reducing aggregate demand.

Question 13

All else being equal,people generally prefer __________ in their financial affairs.

Accepted Answer

Smoothness and predictability in financial affairs provide a sense of stability and security to individuals. This allows for better planning and decision-making in regards to investments, savings, and expenses. Volatility, uncertainty, and ups and downs can cause anxiety, stress, and financial instability. Government intervention may be desirable in certain situations, but it is not generally preferred in all financial affairs.

Question 14

During recessionary periods:

Accepted Answer

During recessionary periods, the government usually increases its spending through stimulus measures aimed at boosting the economy. This leads to an increase in outlays. At the same time, tax revenue falls because people and businesses are earning less and therefore paying less in taxes.

Question 15

Countercyclical fiscal policy:

Accepted Answer

Countercyclical fiscal policy refers to fiscal policy measures that are taken by the government in order to counteract the business cycle. This means that during times of recession or economic downturn, the government may use expansionary fiscal policy (such as increasing government spending or cutting taxes) in order to stimulate economic activity and promote growth. Conversely, during times of economic expansion, the government may use contractionary fiscal policy (such as reducing government spending or increasing taxes) in order to cool down the economy and prevent it from overheating.

Question 16

Assume that the government is currently balancing the national budget so that outlays equal tax revenue.Then the economy starts into an expansion,and the government decides to decrease government spending by $50 billion.As a result:

Accepted Answer

During an economic expansion, tax revenues typically increase due to higher incomes and profits. By decreasing government spending by $50 billion, the government is likely to create a surplus, as the increased tax revenue combined with reduced spending will exceed the initial balanced budget.

Question 17

Congress and the president would conduct contractionary fiscal policy in order to:

Accepted Answer

Contractionary fiscal policy involves reducing government spending and increasing taxes in order to decrease the level of aggregate demand in the economy. This is done in order to combat inflationary pressures that may be present in the economy.

Question 18

If the economy starting at full-employment output begins to enter into an expansion,one would expect Congress and the president to conduct:

Accepted Answer

The answer of If the economy starting at full-employment output...

Question 19

Contractionary fiscal policy occurs when:

Accepted Answer

Contractionary fiscal policy involves decreasing government spending and/or increasing taxes in order to decrease aggregate demand and slow down economic expansion. This helps to combat inflation by reducing the amount of money flowing through the economy, which can contribute to rising prices.

Question 20

The goal of contractionary fiscal policy is to shift the __________ curve to the __________.

Accepted Answer

Contractionary fiscal policy aims to reduce aggregate demand in the economy by decreasing government spending, increasing taxes, or both. This reduces the amount of money in the economy and shifts the aggregate demand curve to the left. As a result, inflationary pressures are reduced, but at the cost of slower growth and higher unemployment in the short run.

Quiz 16: Fiscal Policy