Question 1

Tax revenues can rise as a result of a decrease in income tax rates,as long as the tax base increases sufficiently.

Accepted Answer

When income tax rates are lowered, individuals and businesses may have more disposable income, which can lead to increased spending and investment. This in turn can stimulate economic growth and create new jobs, leading to more earners and a broader tax base. If the increase in taxpayers is greater than the loss in revenue from lower tax rates, overall tax revenues may increase. This concept is known as the Laffer Curve. However, it is important to note that the relationship between tax rates and tax revenues is complex and dependent on a variety of economic factors.

Question 2

"Politics is too often the thing that gets in the way of good economic policy being implemented." The economist who said this most likely

Accepted Answer

The statement suggests a preference for policies that are not easily influenced by political agendas or changes, which aligns with the concept of rule-based monetary policy. Rule-based policies are designed to follow a set of guidelines that limit the discretion of policymakers, thereby reducing the influence of politics on economic decisions.

Question 3

Those economists who view the AS curve as being vertical see more government tools capable of raising Real GDP than do the economists who view the AS curve as being upward-sloping.

Accepted Answer

Economists who view the AS curve as being upward-sloping believe that the economy can only achieve a certain level of Real GDP due to supply-side constraints such as the availability of resources and technology. Therefore, they may not see many government tools that can significantly raise Real GDP beyond this level. On the other hand, economists who view the AS curve as being vertical believe that the economy operates at full employment and any increase in aggregate demand can only cause inflation. They may see more government tools capable of raising Real GDP by shifting the AS curve outward through policies that increase productivity or decrease resource costs.

Question 4

If the AS curve is vertical,then it follows that

Accepted Answer

When the Aggregate Supply (AS) curve is vertical, it indicates that the economy is at its full capacity or potential output, meaning changes in aggregate demand will not affect the output level but will instead lead to changes in the price level. Therefore, real GDP changes cannot arise due to demand-side factors (since output is fixed at the potential level), and price level changes will arise from shifts in aggregate demand, as the supply side is unresponsive to price changes at this point.

Question 5

Economist B says all of the following: The economy needs expansionary fiscal policy to remove it from a recessionary gap.Government should either raise its __________ or cut _________________.I believe the tax multiplier is larger than the government spending multiplier,so I suggest government ___________________.

Accepted Answer

Economist B suggests using expansionary fiscal policy, which involves either increasing government spending or cutting taxes to stimulate the economy. Since they believe the tax multiplier is larger than the government spending multiplier, they recommend cutting taxes to have a more significant impact.

Question 6

"Demand-side fiscal policy is capable of changing Real GDP." This statement would be most likely to be said by an economist who believes that

Accepted Answer

Demand-side fiscal policy, such as government spending and tax cuts, is aimed at influencing the level of demand in the economy. Economists who believe that the Aggregate Supply (AS) curve is upward sloping (B) think that increases in demand can lead to increases in output (Real GDP), as well as prices. Those who believe that there is little, if any, crowding out (D) also support the effectiveness of demand-side fiscal policy, as they argue that government spending does not fully replace (or crowd out) private sector spending. Therefore, both B and D support the statement, making E the correct choice.

Question 7

"Expansionary fiscal policy is needed to increase Real GDP --- at least in the short run." The economist who said this most likely believes that

Accepted Answer

The statement suggests that the economist believes that the AS curve is upward-sloping, meaning that in the short run, an increase in government spending will lead to an increase in Real GDP. Option A is not relevant to the statement made. Option B suggests a scenario where fiscal policy may not be effective in increasing Real GDP. Option C suggests that fiscal policy may be ineffective due to crowding out, which is not consistent with the economist's belief that expansionary fiscal policy is needed for GDP growth. Option E includes options that are not consistent with the economist's belief.

Question 8

"We lose more by letting the company fail than by having the government save it." This was most likely said by an economist who believes that

Accepted Answer

The statement suggests that the economist believes that bailouts (government efforts to save failing companies) are necessary in some situations. This indicates a belief that the consequences of allowing a company to fail would be more detrimental than the potential costs of a government bailout, which aligns with choice B.

Question 9

Economist A argues that a "dollar spent is a dollar spent." This economist is most likely to agree with which of the following:

Accepted Answer

Economist A believes that the impact of government spending or taxation is primarily related to the amount of money spent or collected, rather than the specific details of where the money goes or which taxes are altered. Therefore, they would be most likely to support a view that emphasizes increases in government spending (regardless of the specific programs funded) as the best approach.

Question 10

"The only thing that results from expansionary demand-side fiscal policy is that the price level will rise." The economist who said this most likely believes that

Accepted Answer

The statement, "The only thing that results from expansionary demand-side fiscal policy is that the price level will rise," implies that the AS (Aggregate Supply) curve is vertical, meaning that increases in aggregate demand only result in higher price levels instead of increased output. This is typically associated with classical economists who believe that the economy will always return to its long-run equilibrium, regardless of fiscal policy. Choice A suggests the belief in crowding out, which can be a result of expansionary fiscal policy, but it is not necessary for this statement. Choice C contradicts the statement. Choice D is unrelated to the statement. Choice E includes choice B and contradicts choice A.

Question 11

The Taylor Rule is an example of

Accepted Answer

The Taylor Rule is a rule-based monetary policy that provides guidance on how central banks should set short-term interest rates in response to changes in inflation, output, and other economic conditions. It is not discretionary, as it follows a specific formula based on economic data, and it does not always set the money supply growth rate at 3 percent. The Taylor Rule can be used for both expansionary and contractionary monetary policy, depending on the current economic conditions.

Question 12

If income tax rates are cut,the size of the budget deficit will necessarily increase.

Accepted Answer

This is not necessarily true. It depends on how the tax rate cuts impact economic growth, which can in turn increase revenue and offset the decreased tax rates. Additionally, if the tax cuts are accompanied by spending cuts or other revenue increases, the deficit may not necessarily increase.

Question 13

"If we come to a company's rescue this time,they'll take more risks and we'll have to come to their rescue next time,too." The economist who said this most likely

Accepted Answer

The statement implies a belief that bailouts create moral hazard, where companies take excessive risks assuming that they will be bailed out again in the future. This suggests opposition to bailouts.

Question 14

Economist A believes the economy is self-regulating.Economist B believes that wages and prices are inflexible downward.Economist C believes that the AS curve is vertical.Economist D believes that crowding out is likely to be complete.Which economist is most likely to advocate for expansionary fiscal policy in the in the form of greater government spending to remove an economy from a recessionary gap?

Accepted Answer

Economist B, who believes that wages and prices are inflexible downward, is most likely to advocate for expansionary fiscal policy. This belief suggests that in the face of a recession, the economy cannot easily adjust back to full employment through lower wages and prices, thus requiring government intervention through increased spending to stimulate demand and close the recessionary gap.

Question 15

"It matters how the government spends any extra dollars." The economist who said this most likely believes that

Accepted Answer

This statement reflects the idea of marginal analysis in fiscal policy, where the effectiveness of government spending depends on how it affects the economy's overall output. By allocating funds to projects that have a higher multiplier effect on the economy, the government can stimulate growth more effectively.

Question 16

It is a fact that the government spending multiplier is always greater than the tax multiplier.

Accepted Answer

The government spending multiplier and the tax multiplier can vary depending on economic conditions, fiscal policies, and the responsiveness of the economy. There is no rule that the government spending multiplier is always greater than the tax multiplier.

Question 17

If the aggregate supply curve is vertical,it follows that a change in

Accepted Answer

When the aggregate supply curve is vertical, it indicates that the economy is at its full capacity or potential output, meaning changes in aggregate demand (such as changes in the price level) can only originate from the demand side of the economy, not affecting the real GDP. However, changes in real GDP can still originate from the supply side due to factors like technology or resources, affecting the potential output itself.

Question 18

Which of the following is false?

Accepted Answer

The answer of Which of the following is false?
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Question 19

If tax rates are cut,tax revenues may rise,fall,or remain unchanged.What actually happens is considered a(n)

Accepted Answer

This is because whether tax revenues rise, fall, or remain unchanged after tax rate cuts is an empirical issue that needs to be observed through data and analysis. It cannot be solely based on theoretical assumptions or self-regulating mechanisms.

Question 20

Which of the statements is false?

Accepted Answer

The tax multiplier can be smaller or larger than the government spending multiplier depending on the specific economic conditions and assumptions of the model being used. Therefore, statement D is false.

Quiz 19: Debates in Macroeconomics Over the Role and Effects of Government