Question 1

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

Accepted Answer

A decrease in tax rate will increase the disposable income of households as they will have to pay less in taxes. As a result, the size of the multiplier effect will also increase, as households will have more money to spend or save, leading to a higher increase in aggregate demand. Therefore, option A is the correct answer.

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

Accepted Answer

The Federal Reserve can adjust monetary policy more quickly than the president and Congress can change fiscal policy, making it more effective in stabilizing the economy in a shorter time frame. Changes in interest rates have a significant impact on the economy, and the Fed has more direct control over monetary policy tools than fiscal policy tools.

Question 4

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

Accepted Answer

The answer of In the long run,most economists agree that...

Question 5

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 6

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

Accepted Answer

The legislative process can take time to enact changes in government spending and tax rates, which may not be timely enough to effectively stabilize the economy. This is one of the limitations of using fiscal policy for stabilization.

Question 7

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 8

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 9

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 10

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 11

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

Accepted Answer

In the long run, a permanent increase in government spending leads to complete crowding out of private spending. This is because the government's increased spending will lead to higher interest rates and decreased investment by the private sector. As a result, the private sector will decrease its spending, leading to complete crowding out.

Question 12

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

Accepted Answer

When consumption, investment, and net exports are more sensitive to changes in interest rates, increases in government spending will lead to larger increases in interest rates, which will further crowd out private spending. This is because higher interest rates make borrowing more expensive for private individuals and businesses, reducing their ability and willingness to spend.

Question 13

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

If private spending becomes more sensitive to interest rate changes, then changes in interest rates will have a greater impact on private spending and less on government purchases, leading to a decrease in the government purchases multiplier.

Question 14

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, leading to further rounds of increased spending and economic activity.

Question 15

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 16

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 the government increases taxes and spending by the same amount, there will still be an effect on aggregate demand, as households may not reduce their consumption spending by the same amount as the increase in taxes. The magnitude of the effect will depend on various factors such as the size of the tax hike, how the government spends the additional revenue, and how households respond to the tax increase.

Question 17

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 18

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 19

The impact of crowding out may be the least

Accepted Answer

During a deep recession, there is an excess of idle resources (such as labor and capital) in the economy. In this situation, crowding out is less likely to occur because an increase in government spending will not lead to a reduction in private investment due to the abundance of available resources.

Question 20

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...

Quiz 18: Fiscal Policy

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