Question 1

Which of the following is an example of crowding out?

Accepted Answer

Crowding out occurs when government spending displaces private sector spending. In option B, the budget deficit causes an increase in interest rates, which leads to a decrease in investment spending by the private sector. This is an example of crowding out. Option A is incorrect because a decrease in the rate of growth of the money supply can lead to a decrease in Real GDP, but it is not an example of crowding out. Option C is incorrect because an increase in tariffs causing a decrease in imports is an example of protectionism, not crowding out. Option D is incorrect because a decrease in government housing subsidies causing an increase in private spending on housing is an example of crowding in, not crowding out.

Question 2

The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.

Accepted Answer

The period between the passage of legislation and the time the tax cut takes effect is called the transmission lag. This is because there needs to be time for the government to implement the necessary changes to the tax system to reflect the new legislation. The other options are incorrect: A) data lag refers to the time it takes for economic data to be collected and analyzed; B) wait-and-see lag is not a commonly used term in economics; and C) legislative lag refers to the time it takes for legislation to be proposed, debated, and passed.

Question 3

Fiscal policy may not work as policymakers intend it to work because of

Accepted Answer

Fiscal policy may not work due to the crowding out effect, where increased government spending leads to higher interest rates and reduces private investment. Additionally, there may be lags in the implementation and impact of fiscal policy measures. However, the position of the physical production possibilities frontier is not directly related to the effectiveness of fiscal policy.

Question 4

Reductions in private spending as a result of increased government spending or the need to finance a budget deficit is called

Accepted Answer

Crowding out occurs when government borrowing leads to higher interest rates, which reduces private investment, leading to a decrease in overall private spending. This can happen because there are a limited amount of funds available to be borrowed, and when the government takes on large amounts of debt, it can push up the interest rates for everyone. As a result, businesses may choose to delay investments or borrow less, leading to a reduction in overall economic activity.

Question 5

With complete crowding out, an increase in government spending

Accepted Answer

Complete crowding out occurs when an increase in government spending leads to a reduction in private spending of the same amount. This is because the increase in government spending leads to an increase in interest rates, which causes a decrease in private investment and consumption spending. As a result, the increase in government spending is completely offset by the reduction in private spending, resulting in no net increase in aggregate demand.

Question 6

Exhibit 11-1
 
-Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, Keynesian economists would most likely propose

Accepted Answer

Keynesian economists advocate for government intervention in the economy, particularly during times of recession or slow economic growth. Point 1 on the graph represents an economy operating below potential GDP, indicating a need for increased aggregate demand. An increase in government purchases would stimulate the economy through increased spending and investment. Decreasing government purchases or increasing taxes would likely decrease aggregate demand and worsen the recession.

Question 7

The lag between an increase in government spending and the impact of this increased spending on the economy is called the __________ lag.

Accepted Answer

The answer of The lag between an increase in government...

Question 8

Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $500 million. This is an example of

Accepted Answer

Incomplete crowding out occurs when an increase in government spending leads to a decrease in private spending, but not at an equal amount. In this case, the increase in public education spending is only partially offset by the decrease in private education spending, resulting in a net increase in education spending overall. Therefore, this scenario is an example of incomplete crowding out.

Question 9

Crowding out results in a decrease in

Accepted Answer

Crowding out refers to the situation when increased government borrowing leads to higher interest rates, which in turn reduces the amount of private investment spending. Therefore, crowding out results in a decrease in private spending, not government spending. Transfer payments and defense spending are not affected by crowding out.

Question 10

Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $700 million. This is an example of

Accepted Answer

This is an example of complete crowding out because the increase in government spending on public education is offset by a decrease in private spending on education, resulting in no net increase in overall education spending.

Question 11

Which of the following illustrates the data lag?

Accepted Answer

Data lag refers to the delay between when an economic event occurs and when it is recognized or recorded. Choice A illustrates this concept by showing a delay between the economic downturn and policymakers' realization of the event.

Question 12

Some economists argue that a rise in the interest rate, brought about by a rise in government borrowing in the loanable funds market to finance a budget deficit, brings in foreign funds in search of the higher interest rate return. This, in turn, dampens the rise in the interest rate. If this is true as far as it goes, there will be __________ crowding out than there would be if foreign funds did not flow into the country.

Accepted Answer

According to the argument presented, if foreign funds flow into the country in search of higher interest rates, the rise in interest rates due to government borrowing leading to a budget deficit will be dampened. This means that there will be less crowding out of domestic investment than there would be if foreign funds did not flow into the country. Therefore, the correct answer is B, less.

Question 13

If there is complete crowding out as a result of an increase in government spending there will be

Accepted Answer

When there is complete crowding out due to an increase in government spending, any increase in aggregate demand from the government spending is exactly offset by a decrease in aggregate demand from other sectors (like private investment), leading to no change in aggregate demand overall.

Question 14

Which of the following illustrates the effectiveness lag?

Accepted Answer

The effectiveness lag refers to the time it takes for a policy to take effect and produce results. Choice D illustrates the effectiveness lag as policymakers have implemented policy X but it will take a few months before it shows results.

Question 15

Which of the following illustrates the wait-and-see lag?

Accepted Answer

The wait-and-see lag is when policymakers delay action until they are sure of the severity and persistence of economic conditions. Option A illustrates policymakers being cautious and not taking action until they are certain of the economic downturn.

Question 16

The AD curve shifts to the left with a __________ in government purchases (G) or a __________ in taxes.

Accepted Answer

A fall in government purchases (G) or a rise in taxes decreases aggregate demand, leading to a leftward shift in the AD curve. On the other hand, a rise in government purchases (G) or a fall in taxes increases aggregate demand, resulting in a rightward shift in the AD curve. Therefore, options A, B, and D are incorrect.

Question 17

If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income, then that individual must have a(n) __________ tax rate of 30 percent.

Accepted Answer

The increase in taxes due to an increase in income is the definition of marginal tax rate. Therefore, the correct answer is D) marginal.

Question 18

Suppose the government attempts to stimulate the economy by increasing spending without increasing taxes. Which of the following statements is most likely to be accepted by someone who believes in crowding out?

Accepted Answer

According to the crowding out theory, when the government increases its spending, it borrows funds from the private sector, causing interest rates to rise. This increase in interest rates leads to decreased investment and consumption, offsetting the initial stimulus effect of the government's spending. Therefore, option C is most likely to be accepted by someone who believes in crowding out. Option A is unlikely to be accepted by someone who believes in crowding out, as it assumes that government spending will have its intended effect without any negative consequences. Option B is unlikely to be accepted by someone who believes in crowding out, as it assumes that businesses will increase their output even more than the government had intended, which goes against the crowding out theory. Option D is incorrect, as there is no such law requiring the government to increase taxes by the same amount as its expenditures.

Question 19

Exhibit 11-1
 
-Refer to Exhibit 11-1. The economy is currently at point 1. Suppose the federal government increases purchases and there is no crowding out. As a result, the aggregate demand (AD) curve in the exhibit

Accepted Answer

An increase in government purchases would shift the AD curve rightward, ideally to go through point 2, as it would increase overall spending and stimulate economic growth. As there is no mention of any other factors changing, such as a decrease in taxes or interest rates, there should be no crowding out, which would otherwise limit the effectiveness of the increase in government purchases.

Question 20

The AD curve shifts to the right with a __________ in government purchases (G) or a __________ in taxes.

Accepted Answer

When there is a rise in government purchases (G) or a fall in taxes, it leads to an increase in aggregate demand. This increase in aggregate demand shifts the AD curve to the right. Conversely, a fall in government purchases (G) or a rise in taxes decreases aggregate demand and shifts the AD curve to the left.

Quiz 11: Fiscal Policy and the Federal Budget