Question 1

In the late 1970s and early 1980s the goals of fiscal policy were

Accepted Answer

The late 1970s and early 1980s were marked by high inflation and slow economic growth, referred to as stagflation. Fiscal policies aimed at addressing these issues were largely unattained, as high inflation persisted and the economic recovery was slow. Some policies, such as tax cuts and increased military spending, may have worsened the situation.

Question 2

Which statement is true?

Accepted Answer

All the statements provided have inaccuracies: A) It's not possible to have inflationary and recessionary gaps simultaneously as they represent opposite economic conditions. B) Being at equilibrium GDP does not necessarily mean the economy is at full employment; it could still be under potential GDP. C) Fiscal policy refers to government spending and taxation decisions, while automatic stabilizers are built-in economic policies that automatically adjust to economic conditions without explicit government intervention.

Question 3

Statement I: If equilibrium GDP is $6 trillion and full employment GDP is $6.5 trillion,we have a recessionary gap of $500 billion.
Statement II: In 1991 and 1992 we had recessionary gaps.

Accepted Answer

B

Question 4

Which statement is true about automatic stabilizers?

Accepted Answer

Automatic stabilizers, such as unemployment insurance, help to reduce the impact of economic downturns on individuals and the economy as a whole. While they cannot completely eliminate the business cycle, they have been effective in mitigating its effects and helping to stabilize economic growth. Therefore, option B is the most accurate statement. Options A, C, and D are incorrect.

Question 5

To close a recessionary gap we should

Accepted Answer

To close a recessionary gap, we need to increase aggregate demand, which can be achieved by increasing government spending (G) and lowering taxes. Increasing government spending will directly increase aggregate demand, while lowering taxes will provide households with more disposable income, which they can spend and thereby increase aggregate demand. Decreasing taxes and decreasing government spending (option B) will decrease aggregate demand, which is contrary to the objective. Option A (increasing both G and taxes) and D (decreasing both G and taxes) will have an offsetting effect on aggregate demand and may not effectively close the recessionary gap. Therefore, option C is the best choice.

Question 6

When there is a recession,the biggest percentage decline would be in

Accepted Answer

During a recession, corporate profits typically decline significantly due to reduced consumer demand and economic activity, leading to a larger percentage drop in corporate after-tax profits compared to other options.

Question 7

If equilibrium GDP is $1 trillion greater than full employment GDP,and there is an inflationary gap of $250 billion,the multiplier is

Accepted Answer

The inflationary gap represents the difference between equilibrium GDP and full employment GDP, which is $250 billion. We are told that equilibrium GDP is $1 trillion greater than full employment GDP, so:

Equilibrium GDP = Full Employment GDP + Inflationary Gap
Equilibrium GDP = Full Employment GDP + $250 billion + $1 trillion
Equilibrium GDP = Full Employment GDP + $1.25 trillion

The multiplier is equal to:

Multiplier = 1 / (1 - MPC)

We are not given the MPC (marginal propensity to consume) in this problem, so we cannot solve for the multiplier directly. However, we do know that the multiplier will be greater than 1 because an increase in aggregate demand (which is necessary to close the inflationary gap) will lead to a larger increase in equilibrium GDP due to the multiplier effect.

Therefore, the only answer choice greater than 1 is D (4), so that is the best choice.

Question 8

Statement I: The federal budget deficit more than doubled between 1987 and 1992.
Statement II: High federal budget deficits tend to push up real interest rates.

Accepted Answer

Statement I is true as the federal budget deficit increased from $149 billion in 1987 to $290 billion in 1992. Statement II is also true as high deficits tend to create demand for borrowing, pushing up interest rates.

Question 9

Most economists would agree that the national debt should be reduced

Accepted Answer

Most economists agree that the best time to reduce the national debt is during periods of prosperity. This is because the economy is strong, tax revenues are higher, and there is less need for government spending to stimulate economic activity. Reducing debt during a recession could exacerbate economic downturns by reducing government spending when it is most needed to stimulate growth.

Question 10

If full employment GDP is $1 trillion greater than equilibrium GDP,and there is a recessionary gap of $400 billion,the multiplier is

Accepted Answer

The multiplier is calculated as the ratio of the change in GDP to the change in autonomous spending. Here, the recessionary gap of $400 billion needs to be closed to reach full employment GDP, which is $1 trillion greater than the current equilibrium. The formula for the multiplier is Change in GDP / Change in spending. Therefore, $1 trillion / $400 billion = 2.5.

Question 11

Budget deficits are appropriate during

Accepted Answer

During recessions, budget deficits can help stimulate the economy by increasing government spending and creating jobs. However, during inflations, budget deficits can exacerbate the inflation by increasing demand without increasing supply, leading to further price increases. Therefore, budget deficits are appropriate during recessions but not inflations.

Question 12

Over the last four decades we have had

Accepted Answer

Over the last four decades, the U.S. government has experienced a mix of deficits and surpluses. For example, during the 1990s, the government ran a series of surpluses. However, since the early 2000s, it has mostly run deficits, with a notable exception in 2015-2016 when there was a small surplus.

Question 13

We have an inflationary gap when

Accepted Answer

An inflationary gap occurs when equilibrium GDP is greater than full employment GDP. This means that the economy is producing more than its potential, leading to higher prices and inflationary pressures. To close the inflationary gap, policymakers may use contractionary monetary or fiscal policies to slow down the economy and reduce inflationary pressures.

Question 14

If full employment GDP is $500 billion greater than equilibrium GDP and the multiplier is 5,there is a recessionary gap

Accepted Answer

The recessionary gap is calculated by dividing the difference between full employment GDP and equilibrium GDP by the multiplier. Therefore, $500 billion / 5 = $100 billion.

Question 15

The national debt passed the $2 trillion mark in

Accepted Answer

The answer of The national debt passed the $2 trillion...

Question 16

Which statement is true about fiscal policy?

Accepted Answer

Fiscal policy is a series of political compromises because it involves the government's use of spending and taxation to influence the economy.

Question 17

If equilibrium GDP is $500 billion greater than full employment GDP and the multiplier is 2.5,there is an inflationary gap of

Accepted Answer

The inflationary gap is calculated by dividing the difference between equilibrium GDP and full employment GDP by the multiplier. Here, $500 billion / 2.5 = $200 billion.

Question 18

If we passed a constitutional amendment requiring a balanced budget every year,this would probably

Accepted Answer

Requiring a balanced budget every year may cause the government to cut spending during times of recession, which could worsen the unemployment rate and potentially prolong the recession to a depression. Additionally, it may also limit the government's ability to provide economic stimulus during downturns.

Question 19

There is a recessionary gap when

Accepted Answer

A recessionary gap occurs when equilibrium GDP is lower than full employment GDP, meaning that there is an underutilization of resources in the economy. This can also be seen as a situation where there is unemployment and resources are not being fully utilized.

Question 20

Fiscal policy deals with each of the following,except

Accepted Answer

Fiscal policy does not deal with the money supply, which falls under the jurisdiction of monetary policy. Fiscal policy involves decisions made by the government regarding spending, taxation, and the federal budget.

Quiz 12: Fiscal Policy and the National Debt