Question 1

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

A decision lag refers to the time it takes for the government to implement a change in fiscal policy in response to economic conditions. In this scenario, the government took six months to determine the change, indicating a decision lag. The other options are not applicable in this context.

Question 2

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 3

Many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the economy because
1) the multiplier effects associated with fiscal policy take a long time;
2) changes in government spending and taxation are too small in relation to the size of the economy to have much effect;
3) there are long and uncertain lags in implementing fiscal policy.
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 1 and 3

Accepted Answer

The answer of Many economists think discretionary fiscal policy is...

Question 4

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 5

The ʺparadox of thriftʺ 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 6

ʺAutomatic fiscal stabilizationʺ 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 7

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

Accepted Answer

Income taxes in Canada are considered to be automatic stabilizers because as income increases, tax revenues also increase, which helps to offset some of the increase in aggregate demand. Conversely, when income decreases, tax revenues decrease as well, which helps to cushion the impact of a recession on the economy. This helps to stabilize economic growth and prevent wild swings in the business cycle.

Question 8

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

The long-run determinants of real GDP are not primarily influenced by aggregate demand, and the paradox of thrift (which is the idea that when individuals save more, it can lead to a decrease in aggregate demand and lower economic growth) does not apply in the long run. Therefore, aggregate demand and the paradox of thrift are not important factors in determining long-run real GDP.

Question 9

An important automatic fiscal stabilizer in Canada is
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 Canada because as individuals' income decreases during a recession, their tax liability decreases as well. This results in increased disposable income which can lead to increased consumer spending and stimulate the economy. Conversely, during economic expansions when individuals' income increases, their tax liability increases as well, helping to prevent excessive inflationary pressures.

Question 10

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) private investment is crowded out, which may reduce the future growth rate of potential output.
D) the effect of the automatic stabilizer is reduced and the economy will be more unstable.
E) both C and D are correct.

Accepted Answer

Option C is correct because a permanent reduction in net tax rates may reduce private investment due to the crowding-out effect. With lower government revenues, the government may need to borrow more from the private sector, thereby increasing interest rates and reducing private investment.

Option D is correct because the automatic stabilizer effect is reduced when net tax rates are permanently lowered. The automatic stabilizer effect refers to the counter-cyclical effect of net taxes on the economy. During an economic downturn, tax revenues fall, and transfer payments rise, thus boosting the disposable income of households and supporting aggregate demand. Conversely, during an economic boom, tax revenues increase, and transfer payments fall, thus dampening aggregate demand. With a permanent reduction in net tax rates, the automatic stabilizer effect is reduced or weakened, thus leading to a more unstable economy overall.

Question 11

The paradox of thrift does 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 answer of The paradox of thrift does not exist...

Question 12

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 Canadaʹs 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 would shift the AD curve to the left. This would create a recessionary output gap, as the economy would be producing below its potential, resulting in high unemployment and lower national income. There is no information given in the question to suggest that the AS curve shifted due to increased factor prices. While potential GDP may have fallen, the question specifically asks about the effect on Canada's economy in terms of the AD/AS model.

Question 13

In the basic AD/AS macro model, the ʺparadox of thriftʺ 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, potential output determines the level of output in the economy. Therefore, the paradox of thrift, which occurs when an increase in savings reduces aggregate demand and leads to a decrease in output, is only a short-term phenomenon as the economy adjusts to the new level of savings and investment. In the long run, changes in savings will not affect potential output, and therefore will not lead to a decrease in output.

Question 14

Which of the following statements about fiscal policy is the best example of ʺgross tuningʺ?
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 15

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 16

Which of the following statements about fiscal policy is the best description of ʺfine tuningʺ?
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 is a fiscal policy approach where the government adjusts its spending and taxing plans on an ongoing basis to keep the economy operating at its potential level of real GDP. This involves making small and frequent changes to fiscal policies to ensure that any fluctuations in the economy are minimized, without causing large swings in output or inflation. The other options describe other types of fiscal policy actions that are not necessarily related to fine tuning.

Question 17

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

The most stable real GDP would result from a combination of a high MPC and a low value of the multiplier. A lower tax rate would also help to stabilize output. Option C has a reasonably high MPC of 0.7, a low tax rate of 0.1, and a relatively low value for the money multiplier of 0.4. Thus, option C is the best choice for producing stable real GDP in the face of autonomous expenditure shocks.

Question 18

Automatic fiscal stabilizers the impact of demand or supply shocks on the economy since governmentʹs 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) does not affect; are constant; are constant

Accepted Answer

Automatic fiscal stabilizers dampen the impact of demand or supply shocks on the economy as they increase during recessions and decrease during booms, helping to stabilize the economy.

Question 19

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 20

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 income taxes, can help reduce the intensity of business cycles by automatically increasing government spending and decreasing tax revenue during economic downturns, and vice versa during economic expansions. They are not designed to make discretionary fiscal policy effective, remove output gaps, promote economic growth, or eliminate price fluctuations.

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

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

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.

The ʺparadox of thriftʺ 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.

ʺAutomatic fiscal stabilizationʺ in the economy refers to

Income taxes in Canada can be considered to be automatic stabilizers because tax

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

An important automatic fiscal stabilizer in Canada is

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

The paradox of thrift does not exist in the long run because

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 Canadaʹs economy?

In the basic AD/AS macro model, the ʺparadox of thriftʺ is only a short-run phenomenon because

Which of the following statements about fiscal policy is the best example of ʺgross tuningʺ?

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?

Which of the following statements about fiscal policy is the best description of ʺfine tuningʺ?

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?

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

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 .

Automatic fiscal stabilizers are most helpful in