Question 1

Joan Robinson,the author of The Second Crisis of Economic Theory,argued that the content of fiscal policy is as important as its aggregate impact on the economy.
The relative emphasis on,and sometimes exclusive concern for,stabilization objectives when using fiscal policy,to the neglect of related GDP content,has been designated by Joan Robinson as the "second crisis of economic theory."

Accepted Answer

This statement accurately reflects the argument made by Joan Robinson in her book "The Second Crisis of Economic Theory." She argues that economists and policymakers often focus too much on the aggregate impact of fiscal policy on stabilizing the economy, and not enough on the specific content of the policies being implemented and how they affect different sectors and groups within the economy. This can lead to unintended consequences and may not address underlying structural problems.

Question 2

Crowding out is the idea that an increase in government spending may cause a reduction in private sector spending.
Crowding out occurs when a reduction in private sector borrowing (and spending)is caused by increased government borrowing.

Accepted Answer

When the government borrows more to fund its spending, it competes with the private sector for available funds in the credit market. This competition raises interest rates, making borrowing more expensive for individuals and businesses, which can lead to a reduction in private sector spending. This phenomenon is known as crowding out.

Question 3

Fiscal policy formation causes a delay in implementation even though a recession can usually be recognized within a few weeks after it begins.
A limitation on fiscal policy is time.In the real world it takes time to recognize that the economy is in trouble.A blip in the unemployment or inflation rate may not signal a trend.Before intervening,we may want to be more certain that a recessionary or inflationary GDP gap is emerging.

Accepted Answer

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Question 4

What will happen in the economy if the government increases spending and increases taxes by equal amounts to pay for that additional government spending?

Accepted Answer

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Question 5

Fiscal policy formation is typically a quick process.
A limitation on fiscal policy is time.In the real world,it takes time to recognize that the economy is in trouble.Then it will take time to develop a policy strategy and to get Congress to pass it.Once Congress authorizes fiscal policy initiatives,it still takes time to implement the policy.Once fiscal stimulus actually hits the economy,we have to wait for the many steps in the multiplier process to unfold.

Accepted Answer

Fiscal policy formation is not typically a quick process due to the time required for recognizing economic issues, developing strategies, obtaining legislative approval, implementing policies, and waiting for the effects to materialize.

Question 6

Time lags in the design,authorization,and implementation of fiscal policy reduce its effectiveness.
In the time it takes for fiscal policy to take effect,the economy could begin to improve on its own due to other internal or external shocks that may have occurred.

Accepted Answer

Time lags can diminish the potency of fiscal policy because by the time it is put into action, the economy may have already experienced some changes that have altered the situation. The benefits of the fiscal stimulus may then be limited.

Question 7

Critics of Keynesian theory object to its apparent endorsement of government growth.
One of the most debated issues in fiscal policy is the balance between the public and private sectors.Critics of Keynesian theory object to its apparent endorsement of government growth.

Accepted Answer

Critics of Keynesian theory argue that it promotes government intervention and spending, which can lead to government growth.

Question 8

How can a tax cut increase investment,and what is the impact on the economy?

Accepted Answer

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Question 9

How does the slope of the AS curve affect the closure of the GDP gap?

Accepted Answer

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Question 10

An increase in government expenditure can crowd out consumption and investment expenditure.
If the government borrows the money from the private sector or taxes the private sector to pay for government expenditures,less credit may be available to finance private consumption and investment,creating an offsetting reduction in private demand.Either way,government spending may "crowd out" some private expenditure.

Accepted Answer

This statement is true. When government expenditure increases and it borrows money from the private sector or taxes the private sector to pay for it, it can lead to a reduction in private consumption and investment expenditure, which is known as crowding out.

Question 11

In formulating fiscal policy it is necessary to specify the amount of the desired AD shift.
The essence of fiscal policy entails deliberate shifting of the aggregate demand curve.The steps required to formulate fiscal policy are straightforward: (1)specify the amount of the desired AD shift (excess AD or AD shortfall)and (2)select the policy tools needed to induce the desired shift.

Accepted Answer

This statement accurately describes the steps involved in formulating fiscal policy.

Question 12

What are the fiscal policy options to reduce an inflationary gap? Do these policies have the same impact?

Accepted Answer

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Question 13

Why is the tax cut multiplier different from the purchases multiplier?

Accepted Answer

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Quiz 11: Fiscal Policy

Crowding out is the idea that an increase in government spending may cause a reduction in private sector spending. Crowding out occurs when a reduction in private sector borrowing (and spending)is caused by increased government borrowing.

What will happen in the economy if the government increases spending and increases taxes by equal amounts to pay for that additional government spending?

Time lags in the design,authorization,and implementation of fiscal policy reduce its effectiveness. In the time it takes for fiscal policy to take effect,the economy could begin to improve on its own due to other internal or external shocks that may have occurred.

Critics of Keynesian theory object to its apparent endorsement of government growth. One of the most debated issues in fiscal policy is the balance between the public and private sectors.Critics of Keynesian theory object to its apparent endorsement of government growth.

How can a tax cut increase investment,and what is the impact on the economy?

How does the slope of the AS curve affect the closure of the GDP gap?

What are the fiscal policy options to reduce an inflationary gap? Do these policies have the same impact?

Why is the tax cut multiplier different from the purchases multiplier?