Question 1

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 an overall increase in aggregate demand. This is because the government spending will have a multiplier effect on the economy, leading to increased income and consumption spending by households. However, the increase in taxes may lead to a decrease in disposable income for households, which could partially offset the increase in aggregate demand.

Question 2

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

Accepted Answer

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

Question 3

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 4

Data indicates that recessions following financial crises ________ recessions which do not follow financial crises.

Accepted Answer

Studies have shown that recessions following financial crises are generally more severe than those not following financial crises. This is likely due to the fact that financial crises often lead to a credit crunch and a decrease in investment, which in turn leads to decreased consumption and economic output.

Question 5

Explain why the tax multiplier is different from the government purchases multiplier,in both sign and relative magnitude.

Accepted Answer

The answer of Explain why the tax multiplier is different...

Question 6

The tax multiplier is calculated as "one minus the government purchases multiplier."

Accepted Answer

The tax multiplier is calculated as "one minus the marginal propensity to consume (MPC) multiplied by the government purchases multiplier."

Question 7

Suppose that the current equilibrium GDP is $14.5 trillion and that potential GDP is $14.3 trillion.Will decreasing government purchases by $200 billion,or raising taxes by $200 billion,restore the economy to potential GDP? Explain.

Accepted Answer

The answer of Suppose that the current equilibrium GDP is...

Question 8

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 9

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 10

Describe the differences (in sign and relative magnitude)between the government purchases multiplier and the tax multiplier.

Accepted Answer

The answer of Describe the differences (in sign and relative...

Question 11

What economic impact would the closing of a nearby military base have on a town? Would people and businesses that did not directly deal with the military personnel be affected?

Accepted Answer

The answer of What economic impact would the closing of...

Question 12

A tax rebate,which is expected to be offered in this and all future years,will

Accepted Answer

A tax rebate typically increases disposable income for consumers, leading to an increase in consumption. This increase in consumption boosts aggregate demand. Moreover, through the multiplier effect, the initial increase in spending from the tax rebate can lead to a larger overall increase in aggregate demand, as the initial spending circulates through the economy.

Question 13

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

Accepted Answer

The legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way. This can limit the effectiveness of fiscal policy in stabilizing the economy, as any measures taken may not be implemented quickly enough to have the desired impact. Additionally, while changes in government spending and tax rates can have an effect on aggregate demand, it may not be significant enough to make a substantial impact on the economy.

Question 14

Compared to the averages for post World War II recessions,the recession of 2007-2009 was ________ in duration and the decline in real GDP was ________.

Accepted Answer

The recession of 2007-2009 was longer in duration than the average post World War II recession, lasting 18 months compared to the average of 11 months. Additionally, the decline in real GDP was greater, with a peak-to-trough decline of 4.3% compared to the average of 2.6%.

Question 15

In the case of an upward-sloping aggregate supply curve,the change in real GDP brought about by a change in government spending will be less than that predicted by the simple government purchases multiplier.

Accepted Answer

An upward-sloping aggregate supply curve means that an increase in government spending would lead to an increase in prices and a decrease in the unemployment rate. This would lead to a smaller increase in real GDP than predicted by the simple government purchases multiplier, which assumes a constant price level.

Question 16

Suppose real GDP is $13 trillion and potential real GDP is $13.5 trillion.If Congress and the president increase government purchases by $500 billion,then the economy will be brought to equilibrium at potential real GDP.

Accepted Answer

Increasing government purchases by $500 billion would result in an increase in aggregate demand, which would push real GDP beyond its potential level, causing inflationary pressures instead of bringing the economy to equilibrium at potential GDP.

Question 17

Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion.If the president and 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 18

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 19

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

Accepted Answer

The Federal Reserve can use monetary policy tools, such as changing interest rates, more quickly and easily than Congress and the president can use fiscal policy tools, such as changing government spending and taxes. Additionally, changes in interest rates tend to have a larger and more immediate effect on the economy than changes in government spending and taxes.

Question 20

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...

Quiz 27: Fiscal Policy