Question 1

In the long run,most economists agree that a permanent increase in government spending leads to

Accepted Answer

This is known as the "crowding out" effect. An increase in government spending leads to an increase in interest rates because the government must borrow money to finance its spending. Higher interest rates make it more expensive for individuals and businesses to borrow, leading to a decrease in private spending. The decrease in private spending is approximately equal to the increase in government spending, resulting in no net increase in overall spending.

Question 2

Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have to do with the government purchases multiplier?

Accepted Answer

The answer of Why would a higher tax rate lower...

Question 3

The crowding out of private spending by government spending will be greater the

Accepted Answer

The more sensitive consumption, investment, and net exports are to changes in interest rates, the greater the impact of government spending on the overall economy. This is because higher government spending increases demand for goods and services, leading to an increase in interest rates. As interest rates rise, private spending on consumption, investment, and net exports becomes less attractive, leading to a decrease in these areas. This is known as crowding out, and the effect is greater when private spending is more sensitive to changes in interest rates.

Question 4

If government increases taxes by the same amount it increases government spending,there will be no effect on aggregate demand: the increase in government spending is offset by an equal decrease in consumption spending by households.

Accepted Answer

If government increases taxes by the same amount it increases government spending, there will still be a net increase in government demand. This is because the decreased consumption spending by households will not fully offset the increase in government spending, resulting in an overall increase in aggregate demand.

Question 5

Suppose Political Party A proposes a tax cut on business income to stimulate the economy.Political Party B opposes the tax cut on business income asserting that it would only help businesses,not the average working man and woman.If you were hired as an economist for Political Party A,explain how the tax cut on business income would help the average working man and woman.

Accepted Answer

The answer of Suppose Political Party A proposes a tax...

Question 6

Expansionary fiscal policy

Accepted Answer

Expansionary fiscal policy can be effective in the short run because it can increase aggregate demand and stimulate economic activity. However, in the long run, there may be crowding out effects that reduce the effectiveness of the policy. Crowding out occurs when government spending increases lead to increased interest rates, which can reduce private sector spending and investment.

Question 7

A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect.

Accepted Answer

A decrease in the tax rate will increase the disposable income of households, as they will have to pay less in taxes, thus leaving them with more money to spend. This will, in turn, increase the size of the multiplier effect, as the increased spending by households will lead to an increase in aggregate demand and economic activity.

Question 8

Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion.If the president and the Congress increased government purchases by $500 billion,what would be the result on the economy?

Accepted Answer

The answer of Suppose real GDP is currently $12.5 trillion...

Question 9

The use of fiscal policy to stabilize the economy is limited because

Accepted Answer

While fiscal policy can have a significant impact on the economy, the legislative process can be slow and it may take time to implement changes. This can limit the effectiveness of fiscal policy in stabilizing the economy in a timely manner.

Question 10

Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion.To move the economy back to potential GDP,Congress should

Accepted Answer

The answer of Suppose real GDP is $12.1 trillion and...

Question 11

An increase in the sensitivity of private spending (consumption,investment,and net exports)to changes in the interest rate ________ the government purchases multiplier.

Accepted Answer

An increase in sensitivity of private spending to changes in the interest rate implies that private spending is more responsive to interest rate changes. This means that a change in interest rates will have a greater effect on private spending, and therefore the government purchases multiplier will decrease, as government spending will have a smaller impact on overall spending in the economy.

Question 12

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because

Accepted Answer

The Federal Reserve can quickly change monetary policy by adjusting interest rates and the money supply, while fiscal policy changes by Congress and the president take longer to implement.

Question 13

In absolute value,the tax multiplier is greater than the government purchases multiplier.

Accepted Answer

The government purchases multiplier is typically larger in absolute value than the tax multiplier because every dollar of government spending directly increases aggregate demand by the full amount, while tax cuts indirectly affect aggregate demand through the increase in household disposable income, part of which may be saved rather than spent.

Question 14

If real GDP is $300 billion below potential GDP and the tax multiplier equals -1.5,then how much would the government need to change taxes to bring the economy to equilibrium at potential?

Accepted Answer

The answer of If real GDP is $300 billion below...

Question 15

Crowding out refers to a decline in ________ as a result of an increase in ________.

Accepted Answer

Crowding out occurs when increased government spending leads to a reduction in private sector spending. This happens because government borrowing to finance its expenditures can lead to higher interest rates, which in turn discourages private investment.

Question 16

Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion.To move the economy back to potential GDP,Congress should

Accepted Answer

Lowering government purchases by an amount less than $200 billion can help reduce the inflationary gap without causing a recession, moving the economy closer to its potential GDP.

Question 17

The impact of crowding out may be the least

Accepted Answer

Crowding out occurs when increased government spending leads to decreased private spending, which can ultimately result in a decrease in overall economic growth. During a deep recession, when there is already a lack of private spending, the impact of crowding out may be minimal because there is little private spending to be crowded out. Conversely, during an expansion, when private spending is already high, the impact of crowding out may be more significant. Therefore, choice A is the best option.

Question 18

Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced.What will happen to real equilibrium GDP?

Accepted Answer

When Congress increases spending by $100 billion, it directly injects money into the economy, which increases aggregate demand and thus raises real equilibrium GDP. The tax increase could potentially offset this effect by reducing disposable income and consumption, but government spending tends to have a more direct and immediate impact on aggregate demand than tax changes do on aggregate supply. Therefore, the net effect is an increase in real equilibrium GDP.

Question 19

The multiplier effect following an increase in expenditure is generated by induced increases in consumption expenditure as income rises.

Accepted Answer

The multiplier effect occurs when an increase in spending leads to further increases in spending due to induced consumption expenditure as income rises. This leads to a greater overall increase in economic activity than the initial increase in spending.

Question 20

In the long run,most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending.

Accepted Answer

Most economists agree that a permanent increase in government spending leads to complete crowding out of private spending in the long run. This is because the increase in government spending usually requires an increase in government borrowing, which drives up interest rates and reduces private investment and consumption. This reduced private spending offsets the initial increase in government spending, leading to complete crowding out.

Quiz 27: Fiscal Policy