Question 1

Discretionary fiscal policy will stabilize the economy most when:

Accepted Answer

A

Question 2

If the MPS in an economy is .4,government could shift the aggregate demand curve leftward by $50 billion by:

Accepted Answer

B

Question 3

If the MPS in an economy is .1,government could shift the aggregate demand curve rightward by $40 billion by:

Accepted Answer

The marginal propensity to save (MPS) is 0.1, so the marginal propensity to consume (MPC) is 0.9. The spending multiplier is 1/(1-MPC) = 1/0.1 = 10. To shift aggregate demand by $40 billion, government spending should increase by $4 billion (since $4 billion * 10 = $40 billion).

Question 4

Discretionary fiscal policy refers to:

Accepted Answer

Discretionary fiscal policy refers to intentional changes made by Congress to stabilize the economy, such as increasing or decreasing government spending and changing tax rates. Option A is incorrect because the purpose of discretionary fiscal policy is to stabilize the economy rather than destabilize it. Option B is incorrect because while the president does have authority over some fiscal policies, such as executive orders, the power to change tax rates lies with Congress. Option D is incorrect because it refers to automatic stabilizers, which are not discretionary policies.

Question 5

Fiscal policy refers to the:

Accepted Answer

Fiscal policy involves deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level. This is often done in response to economic fluctuations and recessions to stimulate or cool down the economy. Option B is more closely related to income redistribution policies, while option C describes monetary policy and option D is incorrect as it overlooks the different impacts that changes in government spending and taxes can have on the economy.

Question 6

Expansionary fiscal policy is so named because it:

Accepted Answer

Expansionary fiscal policy is designed to increase aggregate demand and stimulate economic growth, which leads to an expansion of real GDP. This can be achieved through government spending (such as on infrastructure projects) or tax cuts, which puts more money into the hands of consumers and businesses, encouraging them to spend and invest more. While an expansion of the money supply could potentially be a tool used in expansionary policy, it is not what the term refers to specifically. The size of government may or may not be affected by expansionary fiscal policy, depending on the specific policies implemented. Price stability may be a desired outcome of expansionary policy, but it is not the primary goal.

Question 7

Suppose that the economy is in the midst of a recession.Which of the following policies would most likely end the recession and stimulate output growth?

Accepted Answer

Reducing federal tax rates on personal and corporate income is the most likely policy to stimulate output growth during a recession. This is because lower tax rates mean that individuals and companies have more disposable income, which they can then spend or invest, leading to increased aggregate demand and production. Additionally, lower taxes can incentivize businesses to invest in new projects and hire more workers.

Question 8

An appropriate fiscal policy for a severe recession is:

Accepted Answer

During a severe recession, there is a decrease in consumer spending and investment, which slows down the economy. To stimulate economic growth, the government can implement a fiscal policy of decreasing tax rates. This encourages consumer spending and investment, which in turn leads to a boost in economic growth. A decrease in government spending (choice A), appreciation of the dollar (choice C), and an increase in interest rates (choice D) can have a contractionary effect on the economy and worsen the recession.

Question 9

The group of three economists appointed by the president to provide fiscal policy recommendations is the:

Accepted Answer

The Council of Economic Advisers, or CEA, is a group of three economists appointed by the president to provide objective economic advice and counsel on the formulation of both domestic and international economic policy. The CEA is part of the Executive Office of the President and serves as an important link between the president and economic policymakers inside and outside of government.

Question 10

An economist who favored expanded government would recommend:

Accepted Answer

An economist who favors expanded government would recommend increases in government spending during a recession in order to stimulate the economy and create jobs. During times of inflation, this economist would recommend tax increases to reduce consumer spending and inflationary pressures in the economy. Therefore, option D of increases in government spending during recession and tax increases during inflation would be the best recommendation for an economist who favors expanded government.

Question 11

Discretionary fiscal policy is so named because it:

Accepted Answer

Discretionary fiscal policy involves specific changes in government spending and taxes (G and T) that are undertaken by Congress at their discretion to stabilize the economy. It is not automatic or secret, and it is not controlled by the central bank or the Council of Economic Advisers.

Question 12

If the MPC in an economy is .8,government could shift the aggregate demand curve rightward by $100 billion by:

Accepted Answer

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

Question 13

Assume the economy is at full employment and that investment spending declines dramatically.If the goal is to restore full employment,government fiscal policy should be directed toward:

Accepted Answer

If investment spending declines dramatically and the economy is at full employment, there will be a decrease in aggregate demand, which could lead to unemployment. To restore full employment, the government should increase its own spending (government expenditures) in order to boost aggregate demand, which will have a multiplier effect and stimulate economic growth. In order to finance this increased spending, the government may need to run a deficit (excess of government expenditures over tax receipts). Option C is the best choice for this scenario.

Question 14

An economist who favors smaller government would recommend:

Accepted Answer

The answer of An economist who favors smaller government would...

Question 15

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption,$40 billion of investment,$10 billion of net exports,and $20 billion of government purchases.Full-employment GDP is $200 billion.To obtain full employment under these conditions,the government should:

Accepted Answer

The current aggregate demand is $170 billion ($100 billion of consumption + $40 billion of investment + $10 billion of net exports + $20 billion of government purchases). The full-employment GDP is $200 billion. To reach full employment, the aggregate demand must increase by $30 billion. The most effective way to increase aggregate demand is through an increase in government spending (choice C) or a decrease in tax rates, which would increase disposable income and therefore consumption. Encouraging personal saving (choice A) would decrease consumption and investment, and discouraging private investment (choice D) would further decrease investment, both of which would lower aggregate demand and exacerbate the unemployment problem. Decreasing government expenditures (choice B) would decrease aggregate demand and worsen the unemployment problem.

Question 16

If the MPC in an economy is .75,government could shift the aggregate demand curve leftward by $60 billion by:

Accepted Answer

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

Question 17

The effect of a government surplus on the equilibrium level of GDP is substantially the same as:

Accepted Answer

A government surplus means the government is collecting more revenue than it is spending. This increases saving in the economy, as the government is effectively saving the excess revenue. An increase in saving has a contractionary effect on the economy, leading to a decrease in aggregate demand and a decrease in the equilibrium level of GDP.

Question 18

Contractionary fiscal policy is so named because it:

Accepted Answer

Contractionary fiscal policy involves reducing government spending or increasing taxes, both of which reduce aggregate demand in the economy. This is done in order to combat inflation and achieve price stability, rather than to expand real GDP. Thus, the correct answer is (C) is aimed at reducing aggregate demand and thus achieving price stability.

Question 19

Countercyclical discretionary fiscal policy calls for:

Accepted Answer

Countercyclical discretionary fiscal policy aims to use deficits during recessions to stimulate the economy, and surpluses during periods of demand-pull inflation to reduce demand and prevent inflation from rising further. Therefore, choice B is the correct answer.

Question 20

In a certain year,the aggregate amount demanded at the existing price level consists of $100 billion of consumption,$40 billion of investment,$10 billion of net exports,and $20 billion of government purchases.Full-employment GDP is $120 billion.To obtain price-level stability under these conditions,the government should:

Accepted Answer

The aggregate demand is already exceeding the full-employment GDP, which may lead to inflation. To ensure price-level stability, the government should reduce aggregate demand. The best way to do this is to decrease government spending and/or increase tax rates, which will reduce consumption and aggregate demand.

Quiz 32: The Balance of Payments, Exchange Rates, and Trade Deficits