Question 1

Figure: Aggregate Demand and Fiscal Policy  Reference: Ref 18-1 (Figure: Aggregate Demand and Fiscal Policy) In the best case scenario, an economy in a recession at Point Y would use fiscal policy to increase spending growth to

Accepted Answer

The figure shows that at Point Y, the equilibrium output is below potential output, indicating a recession. To bring the economy back to potential output, an increase in spending growth is required. The figure also shows that a 10 percent increase in spending growth would bring the economy back to potential output. Therefore, the best choice is D.

Question 2

The largest component of GDP is

Accepted Answer

Consumption spending, which includes purchases of goods and services by households, typically represents the largest component of GDP in most countries.

Question 3

When using fiscal policy to fight a recession, the government will

Accepted Answer

In fighting a recession, the government will use expansionary fiscal policy, which involves stimulating aggregate demand. This can be achieved by either decreasing taxes or increasing government expenditures or both. This approach will provide consumers and businesses with more money which they can use to spend or invest in the economy, which ultimately leads to more economic activities and growth. Therefore, the best choice is A.

Question 4

Economists believe that government spending sometimes increases growth for all of these reasons EXCEPT

Accepted Answer

Government spending is not typically aimed at lowering inflation or keeping prices and wages steady; rather, it can sometimes lead to inflation if it increases demand too much.

Question 5

Suppose the economy is initially at Point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short run increase in inflation by

Accepted Answer

If the AD curve shifts out to AD4, it means there is an increase in aggregate demand which results in an increase in price levels and inflation. To avoid this, the government can increase taxes, which will reduce consumption spending and investment spending. This will cause the AD curve to shift back to AD1, where inflation will not be as high as at AD4. Increasing government spending will further shift the AD curve out to AD5, which could result in even higher inflation. Therefore, the best choice is to increase taxes so that the AD curve shifts back to AD1.

Question 6

Fiscal policy can offset a positive shock to aggregate demand by raising

Accepted Answer

The answer of Fiscal policy can offset a positive shock...

Question 7

Figure: Aggregate Demand and Fiscal Policy  (Figure: Aggregate Demand and Fiscal Policy) In the best case scenario, effective short-run fiscal policy would take which action to correct an economy in recession at Point Z?

Accepted Answer

Effective short-run fiscal policy would increase government spending or decrease taxes, which would shift the aggregate demand curve to the right, increasing output and returning the economy to Point X.

Question 8

Which of the following could be sources of funding for a government that wants to increase government expenditures? I. taxes II. borrowing from the public III. previous years' surpluses if the government does not have national debt

Accepted Answer

Governments can fund increased expenditures through taxes (I), borrowing from the public (II), and using previous years' surpluses (III) if available, regardless of national debt status.

Question 9

As the recession continued in early 2009, consumer confidence most likely

Accepted Answer

During a recession, consumers typically have less money to spend and may feel uncertain about their financial future, leading to a decrease in consumer confidence.

Question 10

Which of these would help a government fight a recession?

Accepted Answer

Cutting taxes can help fight a recession by increasing consumers' disposable income, thereby encouraging spending and investment, which can stimulate economic growth.

Question 11

The primary tools of fiscal policy are

Accepted Answer

Fiscal policy refers to the use of government spending and taxation to influence the economy. Therefore, the primary tools of fiscal policy are government expenditure and taxation. Money supply and interest rates are tools of monetary policy.

Question 12

Fiscal policy can best be defined as the use of

Accepted Answer

Fiscal policy involves the use of government expenditure, borrowing, and taxation to influence the business cycle. It is used to either stimulate economic growth or slow it down depending on the state of the economy. This policy can be used to increase government spending during a recession or decrease government spending during an economic boom to regulate the economy.

Question 13

To fight a recession, the government can I. increase spending. II. cut taxes. III. buy bonds.

Accepted Answer

The answer of To fight a recession, the government can...

Question 14

Fiscal policy is

Accepted Answer

Fiscal policy refers to the use of government taxes, spending, and borrowing to affect business fluctuations in the economy. Option A refers to only a small part of fiscal policy, while option B only focuses on the income distribution aspect of fiscal policy. Option D is describing monetary policy, which is different from fiscal policy.

Question 15

Fiscal policy involving ____________ is designed to influence business cycle fluctuations.

Accepted Answer

Fiscal policy involves both the taxation of income and government spending as tools to influence business cycle fluctuations. In addition, government borrowing can also be a part of fiscal policy as it affects the overall economy and can impact the effectiveness of other fiscal measures. Therefore, all three options, A, B, and C, are correct answers.

Question 16

When consumers reduce spending, the reduction in velocity of money is split between

Accepted Answer

When consumers reduce spending, it leads to a reduction in the velocity of money, which in turn leads to a decrease in economic growth. This is because fewer transactions are occurring in the economy. However, it also leads to a decrease in demand for goods and services, which can lead to a decrease in inflation. Therefore, the reduction in velocity of money is split between a decrease in growth and a decrease in inflation.

Question 17

In working to correct a recession with fiscal policy, the government can

Accepted Answer

The best choice is to raise government expenditures and/or lower taxes, as this will increase aggregate demand and help stimulate economic growth. Options A and B may not address the root cause of the recession and may even cause inflation. Option C would be more appropriate for addressing long-term growth rather than immediately correcting a recession.

Question 18

Examples of expansionary fiscal policy include increases I. in government spending. II. in income taxes. III. of the money supply.

Accepted Answer

Expansionary fiscal policy involves increasing government spending and/or decreasing taxes to stimulate economic growth. Increasing income taxes is not expansionary, and changes in the money supply are related to monetary policy, not fiscal policy.

Question 19

When consumers cut back on spending what falls?

Accepted Answer

When consumers cut back on spending, the velocity of money falls. This refers to the rate at which money is exchanged in an economy, and a decline in velocity means that money is changing hands less frequently, which can have a negative impact on economic growth. The money supply and interest rates may not necessarily fall in this scenario, and tax rates are determined by government policy rather than individual consumer behavior.

Question 20

Which federal government policy influences business cycle fluctuations by taking action on taxes, spending, and borrowing?

Accepted Answer

Fiscal policy influences business cycle fluctuations by taking action on taxes, spending, and borrowing. Real business cycle policy focuses on productivity and technological progress. Monetary policy influences the money supply and interest rates. Growth policy focuses on long-term economic growth.

Quiz 35: Monetary Policy

Figure: Aggregate Demand and Fiscal Policy Reference: Ref 18-1 (Figure: Aggregate Demand and Fiscal Policy) In the best case scenario, an economy in a recession at Point Y would use fiscal policy to increase spending growth to