Question 1

Net tax revenues that rise with national income act as an automatic stabilizer by ________ the marginal propensity to spend and thereby causing the simple multiplier to ________.
A)increasing; increase
B)increasing; decrease
C)decreasing; equal one
D)decreasing; decrease
E)decreasing; increase

Accepted Answer

Net tax revenues that rise with national income act as an automatic stabilizer by decreasing the marginal propensity to spend (because individuals have less disposable income to spend as taxes increase). This in turn causes the simple multiplier to decrease, as the multiplier effect is dampened by the reduced spending.

Question 2

As a global recession began in late 2008,the governments of all major economies searched for policy responses to dampen the effects of the recession.In general,governments were aiming to
A)shift the AD curve to the left by decreasing tax rates.
B)increase potential GDP.
C)shift the AS curve to the right through large increases in government spending.
D)shift the AD curve to the right through large increases in government spending.
E)shift the AS curve to the left by increasing wage rates.

Accepted Answer

The governments of major economies aimed to shift the AD curve to the right through large increases in government spending to stimulate economic growth and prevent further decline during the recession. Option A, decreasing tax rates, may have been a policy response in some cases, but it is not a comprehensive solution to a global recession. Option B, increasing potential GDP, is a long-term goal that may not be achievable in the short term during a recession. Option C, shifting the AS curve to the right through large increases in government spending, is not an effective solution during a recession as it may lead to inflationary pressures. Option E, increasing wage rates, may lead to a decrease in employment and adversely affect economic growth during a recession.

Question 3

Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since government's net tax revenues ________ during booms and ________ during recessions.
A)magnify; increase; decrease
B)magnify; decrease; increase
C)dampen; increase; decrease
D)dampen; decrease; increase
E)do not affect; are constant; are constant

Accepted Answer

Automatic fiscal stabilizers dampen the impact of demand or supply shocks on the economy since government's net tax revenues increase during booms and decrease during recessions, providing a stabilizing effect. Option A (magnify) and B (magnify) are incorrect as they suggest the stabilizers amplify shocks rather than dampening them. Option D (dampen; decrease; increase) is incorrect as it gets the direction of change for government's net tax revenues wrong. Option E (do not affect; are constant; are constant) is incorrect as it suggests that automatic fiscal stabilizers have no impact, which is not true.

Question 4

Given current limitations,fiscal policy as a macroeconomic stabilizer is more defensible the ________ the output gap being suffered,an argument supporting ________.
A)larger; fine tuning
B)larger; gross tuning
C)smaller; fine tuning
D)smaller; crowding out
E)larger; crowding out

Accepted Answer

Fiscal policy as a macroeconomic stabilizer is more defensible the larger the output gap, because significant deviations from potential output justify more substantial interventions. This aligns with the concept of "gross tuning," which involves making larger adjustments to address more significant economic issues, rather than "fine tuning," which refers to making small adjustments to address minor deviations.

Question 5

Consider the simplest macro model with demand-determined output.Other things being equal,the ________ the value of the simple multiplier,the ________ stable is real GDP in response to shocks to autonomous spending.
A)larger; more
B)larger; less
C)smaller; more
D)smaller; less
E)both B and C are correct

Accepted Answer

The simple multiplier amplifies changes in autonomous spending, so a larger multiplier means real GDP is more sensitive (less stable) to spending shocks, while a smaller multiplier means GDP is less sensitive (more stable). Thus, both B and C are correct.

Question 6

Suppose the economy is experiencing a significant recessionary gap,but it has taken the government six months to determine that it will change fiscal policy.This is an example of
A)an execution lag.
B)fine tuning.
C)gross tuning.
D)a decision lag.
E)automatic fiscal stabilizers.

Accepted Answer

This scenario is an example of a decision lag, which refers to the delay between when an economic problem is identified and when the government takes action to address it. In this case, the government took six months to determine a change in fiscal policy, indicating a decision lag. The other options don't accurately describe this situation. Fine tuning refers to small adjustments made to the economy, while gross tuning refers to large-scale changes. Execution lag refers to the time it takes for a policy to take effect, while automatic fiscal stabilizers refer to government programs that automatically stabilize the economy without the need for intervention.

Question 7

Which of the following statements about fiscal policy is the best example of "gross tuning"?
A)The government continuously alters its spending and taxing plans to hold real GDP at potential.
B)The government cuts taxes to remove a large and persistent recessionary gap.
C)The government increases its spending to reduce an inflationary gap.
D)The government decreases tax rates to decrease an inflationary gap.
E)The government uses automatic stabilizers to reduce any output gaps.

Accepted Answer

Gross tuning refers to significant, deliberate adjustments in fiscal policy aimed at correcting large economic imbalances, such as a persistent recessionary gap. Cutting taxes to stimulate economic activity is an example of such a measure.

Question 8

Why does the "paradox of thrift" not exist in the long run? Because
A)not everyone increases saving in the long run.
B)aggregate supply has an impact on real GDP only in the short run.
C)everyone increases consumption in the long run.
D)changes in aggregate demand have no impact on real GDP in the long run.
E)potential output is determined by changes in the price level.

Accepted Answer

The "paradox of thrift" suggests that if everyone saves more during times of recession, aggregate demand will fall, leading to a decrease in economic growth. However, in the long run, changes in aggregate demand do not affect real GDP because the economy adjusts to its potential output, which is determined by factors like technology, capital, and labor, rather than by current levels of aggregate demand.

Question 9

Which of the following statements about fiscal policy is the best description of "fine tuning"?
A)The government continuously alters its spending and taxing plans to hold real GDP at potential.
B)The government cuts taxes to remove a large and persistent recessionary gap.
C)The government increases its spending to reduce an inflationary gap.
D)The government decreases tax rates to decrease an inflationary gap.
E)The government uses automatic stabilizers to reduce any output gaps.

Accepted Answer

"Fine tuning" refers to the continuous adjustment of government spending and taxation to keep the economy operating at or near its potential output. This involves making small changes to fiscal policy as needed to achieve economic stability and avoid recession or inflation. Option A best describes this concept. Options B, C, and D describe more dramatic policy interventions to address specific gaps or imbalances in the economy, while option E refers to the automatic stabilizers built into the tax and welfare system that help to cushion the impact of economic fluctuations.

Question 10

Consider the global recession that began in late 2008.In terms of the AD/AS model,which of the following statements best describes the macroeconomic effect on Canada's economy?
A)The AD curve shifted to the right due to reduced demand for Canadian exports,which created a recessionary gap.
B)The AD curve shifted to the left due to reduced demand for Canadian exports,which created a recessionary output gap.
C)The AS curve shifted to the right due to increased factor prices,which created a recessionary gap.
D)The AS curve shifted to the left due to increased factor prices,which created a recessionary gap.
E)Potential GDP fell,which reduced actual national income.

Accepted Answer

The global recession led to reduced demand for Canadian exports, which shifted the AD curve to the left. This created a recessionary output gap as actual output fell below potential output. Option A is incorrect as a shift of the AD curve to the right would have caused inflationary pressures, not a recession. Option C is incorrect as a shift of the AS curve to the right would have resulted in increased output and a decrease in prices, not a recession. Option D is incorrect as an increase in factor prices would cause a shift of the AS curve to the left, resulting in stagflation, not just a recession. Option E is incorrect as a fall in potential GDP would not directly cause a recession but rather a long-term decline in economic growth.

Question 11

"Automatic fiscal stabilization" in the economy refers to
A)the properties of government spending and taxation that cause the simple multiplier to be increased.
B)the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap.
C)the properties of government spending and taxation that cause the simple multiplier to be reduced.
D)the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap.
E)all discretionary fiscal policies.

Accepted Answer

Automatic fiscal stabilization refers to how government spending and taxation automatically adjust to economic changes without new legislation, thereby dampening economic fluctuations. This typically reduces the impact of changes in the economy on the aggregate demand, hence reducing the simple multiplier effect.

Question 12

Consider a simple macro model with demand-determined output.Which of the following parameters will produce the most stable real GDP in the face of autonomous expenditure shocks?
A)MPC = 0.8,t = 0.2,m = 0.3
B)MPC = 0.7,t = 0.3,m = 0.2
C)MPC = 0.7,t = 0.1,m = 0.4
D)MPC = 0.9,t = 0.2,m = 0.4
E)MPC = 0.8,t = 0.1,m = 0.2

Accepted Answer

In a demand-determined output model with autonomous expenditure shocks, the more stable real GDP is achieved when the MPC is lower, the tax rate is higher, and the marginal propensity to import (m) is lower. 
Option C has a relatively lower MPC, higher tax rate, and lower marginal propensity to import compared to the other options, which would make it the best choice for achieving stability in real GDP in the face of autonomous expenditure shocks.

Question 13

In the basic AD/AS macro model,the "paradox of thrift" is only a short-run phenomenon because
A)consumers exhibit cyclical consumption behaviour.
B)in the long run output is determined by potential output.
C)savings are transformed into expenditures in the long run.
D)the marginal propensity to consume is fixed in the long run.
E)consumers base their consumption expenditures only on their lifetime income.

Accepted Answer

In the long run, output is determined by potential output, meaning that the economy will eventually adjust to any changes in spending behavior. Thus, the paradox of thrift, which suggests that an increase in savings can lead to a decrease in aggregate demand and output in the short run, does not persist in the long run.

Question 14

Which of the following is an important automatic fiscal stabilizer in the Canadian economy?
A)the exchange rate
B)the marginal propensity to consume
C)the marginal propensity to import
D)the income-tax system
E)government purchases of goods and services

Accepted Answer

The income-tax system is an important automatic fiscal stabilizer in the Canadian economy as it is designed to decrease the tax burden during economic downturns and increase it during boom times. This helps stabilize aggregate demand by putting more money into people's pockets during a recession and reducing it during inflationary periods.

Question 15

The "paradox of thrift" refers to the understandable tendency of people who are worried about their economic situation to ________ their saving,but in aggregate this behaviour causes a ________ recession.
A)decrease; more severe
B)decrease; less severe
C)increase; more severe
D)increase; less severe
E)increase; shorter

Accepted Answer

The "paradox of thrift" posits that while it's rational for individuals to save more during economic uncertainty, if everyone does so simultaneously, it reduces overall consumption. This decrease in consumption can lead to a decrease in overall economic activity, potentially making a recession more severe.

Question 16

In the long run,aggregate demand is ________ for determining real GDP,and the "paradox of thrift" ________.
A)not important; applies
B)not important; does not apply
C)the only influence; applies
D)the most important influence; does not apply
E)stable and important; applies

Accepted Answer

In the long run, aggregate demand does not determine real GDP because the economy tends to adjust to its potential output through price and wage changes. The "paradox of thrift," which suggests that increased saving can lead to a decrease in aggregate demand, thereby reducing income and savings, does not apply in the long run as the economy adjusts to its full-employment output.

Question 17

Consider a simple macro model with demand-determined output.Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks?
A)MPC = 0.8,t = 0.2,m = 0.3
B)MPC = 0.7,t = 0.3,m = 0.2
C)MPC = 0.7,t = 0.1,m = 0.4
D)MPC = 0.9,t = 0.2,m = 0.4
E)MPC = 0.8,t = 0.1,m = 0.2

Accepted Answer

The answer of Consider a simple macro model with demand-determined...

Question 18

Why are income taxes in Canada considered to be automatic stabilizers? Because
A)tax revenues increase when income increases,thereby offsetting some of the increase in aggregate demand.
B)tax revenues decrease when income increases,thereby intensifying the increase in aggregate demand.
C)tax structures can be changed when the Minister of Finance brings down a budget.
D)tax revenues are changed through discretionary fiscal policy to keep the budget balanced.
E)tax revenues are changed through discretionary fiscal policy to create surpluses in recessions.

Accepted Answer

Income taxes in Canada are automatic stabilizers because tax revenues increase when income increases, which offsets some of the increase in aggregate demand. This helps to stabilize the economy during times of economic growth and prevent overheating. Additionally, when incomes decrease, tax revenues also decrease, which helps to support aggregate demand during recessions.

Question 19

Automatic fiscal stabilizers are most helpful in
A)making discretionary fiscal policy effective.
B)removing persistent output gaps.
C)promoting economic growth.
D)eliminating price fluctuations in the economy.
E)reducing the intensity of business cycles.

Accepted Answer

Automatic fiscal stabilizers, such as unemployment insurance and progressive taxation, work automatically to reduce the severity of economic downturns and soften the impact of business cycles. They do not necessarily eliminate output gaps or promote growth, but they can help to stabilize the economy by providing a safety net for individuals during times of economic hardship.

Question 20

Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP.One disadvantage of this policy is that
A)the effect of economic shocks on government revenues becomes more volatile,while the economy becomes more stable.
B)further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer.
C)the level of private investment increases,which will destabilize the level of real GDP.
D)the effect of the automatic stabilizer is reduced and the economy will be more unstable.
E)the level of private investment decreases,which opens up a recessionary gap.

Accepted Answer

A permanent reduction in the net tax rate reduces the effectiveness of the tax system as an automatic stabilizer, meaning that it will have less ability to stabilize the economy during economic downturns. This can lead to increased economic instability and volatility, making the economy more susceptible to shocks.

Quiz 24: From the Short Run to the Long Run: the Adjustment of Factor Prices

Net tax revenues that rise with national income act as an automatic stabilizer by the marginal propensity to spend and thereby causing the simple multiplier to .

As a global recession began in late 2008,the governments of all major economies searched for policy responses to dampen the effects of the recession.In general,governments were aiming to

Automatic fiscal stabilizers the impact of demand or supply shocks on the economy since government's net tax revenues during booms and during recessions.

Given current limitations,fiscal policy as a macroeconomic stabilizer is more defensible the the output gap being suffered,an argument supporting .

Consider the simplest macro model with demand-determined output.Other things being equal,the the value of the simple multiplier,the stable is real GDP in response to shocks to autonomous spending.

Suppose the economy is experiencing a significant recessionary gap,but it has taken the government six months to determine that it will change fiscal policy.This is an example of

Which of the following statements about fiscal policy is the best example of "gross tuning"?

Why does the "paradox of thrift" not exist in the long run? Because

Which of the following statements about fiscal policy is the best description of "fine tuning"?

Consider the global recession that began in late 2008.In terms of the AD/AS model,which of the following statements best describes the macroeconomic effect on Canada's economy?

"Automatic fiscal stabilization" in the economy refers to

Consider a simple macro model with demand-determined output.Which of the following parameters will produce the most stable real GDP in the face of autonomous expenditure shocks?

In the basic AD/AS macro model,the "paradox of thrift" is only a short-run phenomenon because

Which of the following is an important automatic fiscal stabilizer in the Canadian economy?

The "paradox of thrift" refers to the understandable tendency of people who are worried about their economic situation to their saving,but in aggregate this behaviour causes a recession.

In the long run,aggregate demand is for determining real GDP,and the "paradox of thrift" .

Consider a simple macro model with demand-determined output.Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks?

Why are income taxes in Canada considered to be automatic stabilizers? Because

Automatic fiscal stabilizers are most helpful in

Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP.One disadvantage of this policy is that