Question 1

The crowding-out effect implies that:

Accepted Answer

The crowding-out effect is caused by an increase in government purchases that leads to an increase in the demand for loanable funds, which causes interest rates to rise. Higher interest rates reduce private investment spending, which offsets the initial increase in government purchases. This decrease in private investment is known as the crowding-out effect. Therefore, option D is the correct answer as it describes the effect of an increase in government purchases on private spending through the increase in the demand for loanable funds.

Question 2

Expansionary fiscal policy will result in a ____ price level and ____ employment in the short run.

Accepted Answer

Expansionary fiscal policy involves increasing government spending and/or cutting taxes in order to stimulate the economy. This leads to an increase in aggregate demand, which in the short run, results in higher output and lower unemployment. However, as demand increases, so does price level. Therefore, the correct answer is A) higher price level and higher employment in the short run.

Question 3

The time span between the beginning of a downturn and the time by which hard data to indicate a downturn is made available is called:

Accepted Answer

The recognition lag refers to the time it takes for the data to become available that confirms a downturn has occurred. It can take several months before official statistics are released that can confirm a recession has started, meaning that the recognition lag can be quite long.

Question 4

A decrease in transfer payments or an increase in taxes would ____ disposable income of households and thus ____ in consumption purchases.

Accepted Answer

A decrease in transfer payments or an increase in taxes would reduce disposable income of households and thus decrease consumption purchases.

Question 5

A major advantage of automatic stabilizers is that they:

Accepted Answer

Automatic stabilizers are built-in mechanisms in the economy that automatically stabilize economic activity without any additional legislative action. They work automatically during economic ups and downs and help stabilize the economy by providing a cushion to the impact of changes in economic activity on people's incomes and expenses. Since they do not require any additional legislative action, they can help stabilize the economy quickly without bureaucratic delays. Therefore, option B is the correct choice. The other options are incorrect as they do not correctly describe the function of automatic stabilizers.

Question 6

The federal government funds deficit spending by:

Accepted Answer

The federal government funds deficit spending by issuing bonds. The government will issue bonds to borrow money from investors, essentially lending the government money that will be paid back with interest at a later date. This provides the government with the funds needed to cover their budget deficit.

Question 7

Economists agree that the multiplier effect on real output is close to zero when:

Accepted Answer

The multiplier effect is the amount by which an initial change in spending is magnified or multiplied to cause a larger change in GDP. When the economy is at or near full employment, any increase in spending will not result in an increase in output, as there are no available resources (such as labor) to produce additional output. Therefore, the multiplier effect is close to zero in this scenario.

Question 8

Justification of a government program based on the jobs that it will create rather than the merits of the program itself is known as the:

Accepted Answer

The justification of a government program based on the jobs it will create rather than the merits of the program itself is known as the broken window fallacy. This fallacy argues that destruction or wasteful spending can be good for the economy because it creates work for people to fix or clean up the damage. However, this ignores the opportunity cost of the resources that could have been used for more productive purposes, and ultimately leads to a loss of wealth and economic growth.

Question 9

Which group or groups buy U.S. public debt?

Accepted Answer

All of the above - Government agencies, private individuals, and private institutions buy U.S. public debt. This includes entities such as the Federal Reserve, foreign governments, banks, insurance companies, and pension funds.

Question 10

The larger the MPC:

Accepted Answer

The larger the Marginal Propensity to Consume (MPC), the larger the effect of any change in income (such as from business taxes reducing investment) on aggregate demand, because a higher MPC means that consumers are more likely to spend additional income, amplifying the impact of changes in income on the economy.

Question 11

Each additional round of the multiplier process will tend to be larger:

Accepted Answer

The multiplier process amplifies the effect of an initial change in spending through successive rounds of spending, primarily influenced by the marginal propensity to consume (MPC). The less people save (i.e., the higher the MPC), the larger each additional round of spending will be, as more of each income increase is spent rather than saved.

Question 12

In the open market economy, contractionary fiscal policy would ______the demand for money and interest rates would_______ and the dollar________ and net exports_______.

Accepted Answer

Contractionary fiscal policy reduces government spending and increases taxes, which decreases the disposable income of households and firms, leading to a decrease in the overall demand for goods and services. This decrease in demand for goods and services will, in turn, lead to lower demand for money, as the need for funds to finance production or consumption declines. As a result, interest rates will generally fall, as there is less demand for borrowing, and the dollar will depreciate, as foreign investors become less interested in investing in the country. This may lead to an increase in net exports, as the cheaper dollar makes exports more affordable and imports more expensive.

Question 13

The argument that an increase in aggregate demand, as a result of an increase in government purchases, will be offset by increases in savings (less current consumer spending) for future taxes is called:

Accepted Answer

The argument described in the question refers to the Ricardian equivalence theorem, which suggests that consumers may anticipate future taxes to pay for any increase in government spending, leading to higher savings and lower current consumption. This can offset the expansionary effect of government purchases on aggregate demand. The other options, such as the crowding out effect or the budget deficit/surplus effects, have different implications for the relationship between government spending and the economy.

Question 14

If Melanie had $200,000 of income and spent $180,000 on consumption in 2010 and had $300,000 of income and spent $240,000 on consumption in 2011:

Accepted Answer

The answer of If Melanie had $200,000 of income and...

Question 15

Which of the following is false?

Accepted Answer

The crowding out effect does occur with a tax change. When government spending increases, it can be financed either by borrowing or by increasing taxes. If taxes are increased, households and firms have less disposable income, which reduces their spending and investment. This reduces the effectiveness of the expansionary fiscal policy and leads to crowding out.

Question 16

A cut in marginal tax rates would:

Accepted Answer

The answer of A cut in marginal tax rates would:
...

Question 17

Which of the following is true?

Accepted Answer

Explanation: A) is incorrect because the fraction of total disposable income spent on consumption is the average propensity to consume, not marginal. B) is incorrect because a fall in the real interest rate makes more projects profitable, but it does not shift the demand for investment curve; it moves along the curve. C) is incorrect because excess inventories typically reduce the incentive to invest in new capital.

Question 18

Will the national debt have to be paid off (i E., reduced to zero) in the future?

Accepted Answer

The national debt can be refinanced by issuing new bonds to pay off old ones, allowing for the debt to continue without necessarily being paid off in full.

Answer: C 
 While the national debt is a significant financial obligation of the federal government, it is not technically a contractual obligation that must be paid off in full like other debts. There is no specific deadline for paying off the national debt, and the government can continue to issue new bonds to refinance it.

Answer: D 
 While the national debt would technically need to be paid off in the future, a significant portion of it is held by the Federal Reserve Bank, which means that the repayment process would likely involve an accounting transaction between the Fed and the Treasury rather than a traditional debt repayment.

Question 19

After legislation is signed into law, the time it takes before actual fiscal stimulus is noticed is termed as:

Accepted Answer

Impact lag refers to the time it takes for the full effects of a policy action, such as fiscal stimulus, to be felt in the economy after it has been implemented.

Question 20

The time span between recognition of the need for a policy change and the legislation being signed into a law is known as:

Accepted Answer

Implementation lag refers to the period between the decision to change policy and the actual implementation of the policy, which includes the time taken for legislation to be signed into law.

Quiz 16: The Markets for Labor, Capital, and Land