Question 1

Economists are most concerned with ________ government deficits.

Accepted Answer

Economists are most concerned with structural government deficits because they indicate a fundamental imbalance in the budget that persists even when the economy is at full capacity, suggesting long-term fiscal sustainability issues.

Question 2

The "Yes - Markets Self-Adjust" camp believes the long-run benefits of increased aggregate supply outweigh the short-run mismatches between reduced aggregate demand and aggregate supply.

Accepted Answer

This camp believes that markets will eventually adjust to changes in supply and demand, resulting in long-run benefits for the economy. They view short-term mismatches as temporary and not as significant as the potential long-term gains from increased supply.

Question 3

Positive externalities are benefits that affect others external to a choice or a trade.

Accepted Answer

Positive externalities occur when an individual's action or decision results in a positive effect on others who are not part of that decision. For example, a person who chooses to get vaccinated not only benefits themselves but also contributes to the health and safety of the community, creating a positive externality.

Question 4

Research and development create positive externalities, promoting economic growth.

Accepted Answer

Research and development (R&D) have a spillover effect on the economy by creating positive externalities, such as new knowledge, technologies, and products. These externalities benefit not only the firm conducting R&D but also other firms and consumers, thereby promoting economic growth.

Question 5

Education and training increase the quality of inputs, increasing potential GDP.

Accepted Answer

Education and training of individuals increase their skills and productivity, which in turn increases the quality of inputs in the production process. This leads to an increase in potential GDP.

Question 6

The "No - Markets Fail Often" camp believes the long-run benefits of increased aggregate supply outweigh the short-run mismatches between reduced aggregate demand and aggregate supply.

Accepted Answer

The "No - Markets Fail Often" camp believes that markets do not always adjust smoothly and efficiently, leading to short-run mismatches between reduced aggregate demand and aggregate supply that can have negative economic consequences. They believe that these market failures can be significant and long-lasting, and may outweigh any benefits from increased aggregate supply in the long run.

Question 7

The Laffer Curve claims that a cut in very high tax rates can increase total tax revenues if there are powerful incentive effects.

Accepted Answer

The Laffer Curve suggests that if tax rates are very high, reducing them can increase economic growth and ultimately lead to higher tax revenues. This is based on the idea that lower tax rates provide individuals and businesses with more incentive to work, invest, and innovate, which can lead to greater economic activity and higher tax revenues overall. However, the concept is subject to debate and relies on various assumptions and circumstances.

Question 8

The "Yes - Markets Self-Adjust" camp worries that fiscal policies increasing aggregate supply cause aggregate demand recessions whose costs outweigh the long-run benefits of economic growth.

Accepted Answer

The "Yes - Markets Self-Adjust" camp typically believes in the self-correcting nature of markets without the need for government intervention. They argue that markets, through mechanisms like price adjustments, can correct imbalances between supply and demand on their own. Concerns about fiscal policies causing aggregate demand recessions are more characteristic of those skeptical about market self-adjustment and wary of the potential negative impacts of such policies on economic stability.

Question 9

The Laffer Curve claims that a cut in tax rates always increases total tax revenues.

Accepted Answer

While the Laffer Curve argues that reducing tax rates can stimulate economic activity and potentially lead to increased tax revenue, the relationship between tax rates and revenue is not always straightforward and depends on various factors such as the current tax rate, the elasticity of demand for the taxed goods or services, the size of the tax base, and the overall state of the economy. Therefore, it is possible for a tax cut to result in a decrease in total tax revenue, especially if the cut is too large or the economy is in a recession.

Question 10

The "No - Markets Fail Often" camp worries that fiscal policies increasing aggregate supply cause aggregate demand recessions whose costs outweigh the long-run benefits of economic growth.

Accepted Answer

The "No - Markets Fail Often" camp is concerned that fiscal policies aimed at increasing aggregate supply can lead to aggregate demand recessions, ultimately outweighing the benefits of economic growth in the long-run.

Question 11

During a recession, government transfer payments ________ and tax revenues ________.

Accepted Answer

During a recession, government transfer payments, such as unemployment benefits, tend to increase as more people are out of work and qualify for these payments. Tax revenues fall because individuals and businesses earn less money, leading to lower income tax and corporate tax collections.

Question 12

Ronald Reagan, Margaret Thatcher and Ontario Premier Mike Harris were all supply-siders.

Accepted Answer

All three politicians were advocates of supply-side economics, which advocates for lower taxes, reduced government regulation and a decrease in government spending to stimulate economic growth.

Question 13

During an economic expansion, government transfer payments ________ and tax revenues ________.

Accepted Answer

During an economic expansion, government transfer payments typically decrease because fewer people need financial assistance due to better employment conditions. Tax revenues rise as incomes increase and more taxes are collected.

Question 14

Positive externalities create market failure and a role for government.

Accepted Answer

Positive externalities occur when the social benefit of an activity exceeds the private benefit. In such cases, the market fails to allocate resources efficiently, as consumers will only consider the private benefit and not the social benefit. This leads to underproduction compared to the socially optimal level. Government intervention, such as subsidies or provision of public goods, can help to increase the production level to the socially optimal level.

Question 15

Positive externalities are costs that affect others external to a choice or a trade.

Accepted Answer

Positive externalities are benefits that affect others external to a choice or a trade, not costs.

Question 16

Education and training create positive externalities, promoting economic growth.

Accepted Answer

Education and training contribute to the development of human capital, which in turn leads to increased productivity and innovation. This results in economic growth not only for the individuals but for the whole society as well, creating positive externalities.

Question 17

The "No - Markets Fail Often" camp worries that savings reduces consumer spending, business sales, and business investment.

Accepted Answer

The "No - Markets Fail Often" camp argues that high levels of savings can lead to reduced consumer spending, which in turn can decrease business sales and investment, potentially leading to economic downturns or recessions. This perspective is concerned with the paradox of thrift, where increased savings can lead to a decrease in overall economic activity.

Question 18

The "Yes - Markets Self-Adjust" camp strongly supports fiscal policies to encourage savings and capital investment.

Accepted Answer

The "Yes - Markets Self-Adjust" camp believes in the power of the market to self-correct and adjust to changes, and therefore supports fiscal policies that encourage savings and capital investment to stimulate economic growth.

Question 19

Fiscal policies encouraging savings and future economic growth can also decrease aggregate demand in the present.

Accepted Answer

Fiscal policies such as increasing taxes or reducing government spending to encourage savings can decrease consumer spending in the present, leading to a decrease in aggregate demand. However, the hope is that these policies will lead to long-term economic growth and stability.

Question 20

Hands-off and hands-on economists agree that externalities from research and development create a role for government in correcting market failure.

Accepted Answer

Both hands-off and hands-on economists recognize the existence of externalities and acknowledge the need for government intervention to address market failures related to research and development.

Quiz 12: Spending Others Money: Fiscal Policy, Deficits, and National Debt