Question 1

The _____ lag can be expected to last 18 to 24 months.

Accepted Answer

The implementation lag refers to the amount of time it takes for a policy or decision to be put into effect. This lag can be expected to last 18 to 24 months, as stated in the question.

Question 2

One goal of cyclically balancing the federal budget is to increase spending and decrease taxes when the economy is booming, to reduce the chance of overheating within the economy.

Accepted Answer

Cyclically balancing the federal budget typically involves increasing spending and decreasing taxes during economic downturns to stimulate growth, and doing the opposite—decreasing spending and increasing taxes—when the economy is booming to prevent overheating.

Question 3

When marginal income taxes become too high, the incentives for individuals to work harder are diminished.

Accepted Answer

When marginal income taxes become too high, individuals have less incentive to work harder because they will see a smaller return for their efforts. This can reduce productivity and economic growth.

Question 4

The _____ lag is the time it takes for policymakers to confirm that the economy is trending into or out of a recession.

Accepted Answer

The recognition lag is the time it takes for policymakers to confirm that the economy is trending into or out of a recession. Option A, information lag, is the time it takes for policymakers to receive data on the current state of the economy. Option C, implementation lag, is the time it takes for policymakers to enact policies to address a recession once they have recognized it. Option D, decision lag, is not a commonly used term in this context.

Question 5

For country A, the present value of all projected future revenues is $400 million and the present value of all projected future spending is $412 million. Country A's fiscal policy is sustainable.

Accepted Answer

The present value of projected future spending is higher than the present value of projected future revenues, indicating that the country is not generating enough revenue to cover its expenses. This suggests that the fiscal policy is not sustainable.

Question 6

Which fiscal policy time lag can occur when the legislative process works slowly?

Accepted Answer

The decision lag occurs when policymakers take time to recognize the need for fiscal policy action and then decide on which policy measures to pursue. Slow legislative process leads to a longer decision-making process, resulting in a longer decision lag.

Question 7

Suppose policymakers wish to use fiscal policy to fight inflation. Which statement is MOST accurate?

Accepted Answer

Using fiscal policy to fight inflation involves decreasing aggregate demand, which can be done through measures such as reducing government spending, increasing taxes, or selling securities. This decreases the amount of money in circulation and reduces consumer spending, ultimately leading to lower inflation. However, this can also result in a rise in unemployment as businesses reduce production in response to decreased demand. Therefore, B is the most accurate statement as it acknowledges the trade-off that policymakers must consider when using fiscal policy to combat inflation.

Question 8

Which policy do supply-side economists believe is the best for increasing the standard of living?

Accepted Answer

Supply-side economists believe that increasing investment in capital that boosts worker productivity is the best policy for increasing the standard of living. This can include policies that promote investment in technology, education, and infrastructure. By boosting worker productivity, businesses can produce more output with the same amount of inputs, leading to higher economic growth and higher wages for workers. Redistributions of wealth and raising taxes could potentially harm economic growth, while increasing the supply of labor may not necessarily lead to an increase in the standard of living if the labor is not productive.

Question 9

_____ policy involves adjusting government spending and tax policies to move the economy toward full employment, economic growth, and low inflation.

Accepted Answer

The policy described is a discretionary fiscal policy, which involves the deliberate adjustment of government spending and tax policies to achieve specific economic goals. Choice A, goal-oriented fiscal policy, is not a commonly used term. Choice B, classical economic policy, refers to the free-market approach advocated by economists such as Adam Smith and is not specific to achieving full employment, economic growth, and low inflation. Choice C, monetary policy, involves the manipulation of interest rates and the money supply by a central bank but does not involve government spending and taxes.

Question 10

A problem with supply-side fiscal policies is that they

Accepted Answer

Supply-side fiscal policies, such as tax cuts and deregulation, may take longer to implement and see their effects compared to demand-side policies like government spending. This is because they rely on businesses and individuals to respond to these incentives and make investment decisions that drive economic growth.

Question 11

When the government is spending more than it is receiving in tax revenues, it is

Accepted Answer

When the government is spending more than it is receiving in tax revenues, it is running a deficit. This means that the government has to borrow money to cover its expenses, which increases the public debt.

Question 12

Mandatory spending can be changed faster than discretionary spending to help fight a recession.

Accepted Answer

Discretionary spending can be adjusted more easily than mandatory spending, which is typically determined by laws and entitlements that are difficult to repeal or modify.

Question 13

Automatic stabilizers are

Accepted Answer

Automatic stabilizers are components of the federal budget that counter the effects of the business cycle without explicit intervention by the president or Congress. They work by automatically increasing government spending and reducing tax revenue during a recession, which stimulates the economy and helps to stabilize it. They also work by automatically decreasing government spending and increasing tax revenue during an expansion, which helps to prevent the economy from overheating. Examples of automatic stabilizers include unemployment insurance, welfare benefits, and progressive income taxes.

Question 14

Public debt owned by U.S. banks, corporations, mutual funds, pension plans, and individuals is called _____ debt.

Accepted Answer

Public debt owned by U.S. banks, corporations, mutual funds, pension plans, and individuals is called internally held debt.

Question 15

If the economy is at full employment, increases in government spending

Accepted Answer

When an economy is already at full employment, any increase in government spending would increase aggregate demand, but the economy is already producing at its maximum potential output, therefore the demand-pull inflation arises. Prices increase as there is no more output to produce and handle the excess demand. As a result, the increase in government spending is primarily absorbed by price increases.

Question 16

Low interest rates are primarily responsible for the fact that the U.S. debt is relatively manageable.

Accepted Answer

Low interest rates mean the U.S. government can borrow money at a lower cost, making it easier to manage the debt. Higher interest rates would increase the cost of servicing the debt, making it more difficult to manage.

Question 17

Suppose the Treasury sells $10 billion worth of securities to the Social Security Administration and $15 billion to the general public. This sale would add _____ to the national debt and _____ to the debt held by the public.

Accepted Answer

The total sale of securities ($10 billion to the Social Security Administration + $15 billion to the general public) adds $25 billion to the national debt. However, only the $15 billion sold to the general public counts towards the debt held by the public, as transactions within government accounts (like the one with the Social Security Administration) do not change the public debt figure.

Question 18

Which statement(s) is/are TRUE? I. One potential problem associated with attempting to cyclically balance the budget is that politicians often do not want to raise taxes or cut spending.
II) When attempting to cyclically balance the budget, politicians can depend on the fact that once policymakers predict the length and intensity of one cycle, it applies to all cycles.
III) One potential problem associated with attempting to cyclically balance the budget is that it requires policymakers to accurately predict the length and intensity of the cycle.

Accepted Answer

Statement I is true, as politicians are often hesitant to take unpopular measures such as raising taxes or cutting spending in order to balance the budget. Statement II is false, as the length and intensity of economic cycles can vary greatly, making it difficult to predict and apply a one-size-fits-all solution to budget balancing. Statement III is true, as accurately predicting the length and intensity of economic cycles is essential to effectively cyclically balancing the budget. Therefore, only statements I and III are true, making choice B the correct answer.

Question 19

A crowding-out effect occurs when government borrowing raises interest rates and discourages investment spending.

Accepted Answer

This is correct. Crowding-out effect is an economic phenomenon where government borrowing increases interest rates, which then reduces investment spending by private investors due to higher costs of borrowing.

Question 20

(Figure: Effects of Policy Shifts) If government spending increases, shifting aggregate demand from _____ to _____, aggregate output will increase from _____ to _____.

Accepted Answer

The answer of (Figure: Effects of Policy Shifts) If government...

Quiz 10: Fiscal Policy and Debt