Question 1

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 2

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 3

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 4

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 through adjustments to interest rates and money supply, whereas changes in fiscal policy require the approval and implementation of Congress and the president. This allows the Federal Reserve to respond more quickly to changes in the economy and stabilize it more effectively.

Question 5

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 6

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 7

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 lasted for 18 months, which is longer than the average length of post World War II recessions of 11 months. Additionally, the decline in real GDP during the 2007-2009 recession was 4.3%, which is greater than the average decline of 2.6%. Therefore, compared to the averages for post World War II recessions, the recession of 2007-2009 was longer in duration and the decline in real GDP was greater.

Question 8

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 9

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 will lead to an increase in aggregate demand and output in the short run. However, if the economy was already at full employment and potential real GDP before the increase in government purchases, then the increase in aggregate demand will only lead to inflationary pressure and not an increase in output. Therefore, the economy will not be brought to equilibrium at potential real GDP.

Question 10

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

Accepted Answer

The tax multiplier is calculated as the negative of the government purchases multiplier. Therefore, the correct statement should be "the tax multiplier is calculated as negative of the government purchases multiplier."

Question 11

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 limits the effectiveness of fiscal policy as it may take too long for policymakers to implement changes in response to economic fluctuations.

Question 12

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 as the economy produces more output, the cost of production increases. Therefore, an increase in government spending may lead to higher prices, which would reduce the purchasing power of consumers and businesses. This would result in a smaller increase in real GDP than predicted by the simple government purchases multiplier, which assumes a constant price level.

Question 13

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 14

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 15

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 effect on aggregate demand. The increase in government spending may not be fully offset by a decrease in consumption spending, as some households may save or invest the increased income from government spending. Additionally, the increased taxes may discourage some households from consumption spending, further impacting aggregate demand.

Question 16

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 17

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 18

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 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 refers to the increase in national income that results from an initial increase in government spending or any other injection of income into the economy. As income rises, people tend to spend more, leading to further increases in consumption expenditure and overall economic activity. This process can continue in a cycle, leading to a larger increase in national income than the initial injection of spending. Therefore, the statement is true.

Question 20

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

Accepted Answer

Research has shown that recessions following financial crises tend to be more severe than those that do not follow financial crises. This is likely because financial crises can create a ripple effect throughout the economy, leading to widespread job losses, decreased spending, and other negative economic consequences.

Quiz 16: Fiscal Policy