Question 1

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 it is progressive, which means that people with higher incomes pay a higher percentage of their income in taxes. During an economic downturn, incomes tend to fall, resulting in lower tax revenues for the government. However, as people's incomes decrease, the percentage of their income that they pay in taxes also decreases, which helps to maintain their disposable income and stimulate consumption. This helps to stabilize the economy during a downturn.

Question 2

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 3

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 Canada's AD curve to the left. This led to a reduction in both output and employment, creating a recessionary output gap. Option A is incorrect because a shift to the right in the AD curve would lead to an inflationary output gap, not a recessionary output gap. Option C is incorrect because a shift to the right in the AS curve would lead to an expansionary output gap, not a recessionary output gap. Option D is incorrect because a shift to the left in the AS curve would lead to stagflation, not a recessionary gap. Option E is incorrect because there is no mention of a decrease in potential GDP in the statement.

Question 4

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 5

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

Discretionary fiscal policy is often considered limited in effectiveness due to the long time it takes for multiplier effects to materialize (1) and the long and uncertain lags in implementing such policies (3).

Question 6

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, help to reduce the intensity of business cycles by automatically increasing government spending and reducing taxes during economic downturns, and decreasing spending and raising taxes during economic expansions.

Question 7

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 8

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 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 fiscal policy to keep the economy close to its full potential output. Option A best describes this approach. Option B refers to a one-time action to remove a recessionary gap, while options C and D refer to actions taken to address an inflationary gap, which are not necessarily part of a fine-tuning approach. Option E refers to the use of automatic stabilizers, which are an important feature of fiscal policy but do not necessarily entail fine tuning.

Question 10

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 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

The parameter values that produce the most stable real GDP in the face of autonomous expenditure shocks are the ones that result in a smaller multiplier. This means a combination of a lower MPC and/or higher leakages (t and m). Among the options provided, Choice C has the combination of a lower MPC (0.7) and higher leakages (t=0.1, m=0.4), which implies a smaller multiplier and therefore a more stable 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, which is not affected by changes in consumption behavior. Therefore, the paradox of thrift, which occurs when increased saving reduces aggregate demand and leads to a decrease in output and employment in the short run, is only a short-run phenomenon. In the long run, any reduction in consumption is offset by an equal increase in investment as savings are transformed into expenditures through financial intermediation.

Question 14

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 15

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

As incomes increase, Canadians move into higher tax brackets and pay more in income taxes, which helps to offset some of the increase in aggregate demand. Similarly, during economic downturns, incomes decrease and taxpayers move into lower tax brackets, resulting in less income tax revenue for the government, which provides a boost to aggregate demand through increased disposable income for taxpayers. Therefore, income taxes in Canada can be considered automatic stabilizers as they automatically adjust to changes in the economy without requiring discretionary fiscal policy changes.

Question 16

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 is an example of a decision lag, which occurs when it takes time for the government to make a decision to change fiscal policy in response to changing economic conditions.

Question 17

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 18

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

In the long run, the economy is at full employment, and changes in aggregate demand do not affect real GDP, as it is determined by factors like technology and resources, not by demand.

Question 19

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)does not affect; are constant; are constant

Accepted Answer

Automatic fiscal stabilizers dampen the impact of economic shocks because they increase tax revenues during booms (reducing demand) and decrease tax revenues during recessions (supporting demand).

Question 20

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.

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

An important automatic fiscal stabilizer in Canada is

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?

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?

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

Automatic fiscal stabilizers are most helpful in

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.

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.

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

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 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

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

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

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

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

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

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