Question 1

When President Obama took office in January 2009, he pledged to pursue an expansionary fiscal policy to try to pull the economy out of the recession. The next month, Congress passed the American Recovery and Reinvestment Act of 2009, a $840 billion package of ________ that was the largest fiscal policy action in U.S. history.

Accepted Answer

The American Recovery and Reinvestment Act of 2009 included both spending increases and tax cuts, aimed at boosting economic activity and creating jobs. This is evident in the description of the package as a "stimulus" plan, intended to stimulate economic growth by injecting money into the economy through increased government spending and individual tax cuts. The other options listed (B, C, D) do not accurately describe the components of the Recovery Act.

Question 2

A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

Accepted Answer

During a recession, tax revenues tend to fall due to decreased economic activity and increased unemployment, while government spending on transfer payments (such as unemployment benefits) tends to rise as more people become unemployed. This combination leads to an increase in the federal budget deficit.

Question 3

An increase in government spending will force an appreciation of the dollar, which causes net exports to fall.

Accepted Answer

The answer of An increase in government spending will force...

Question 4

If Congress and the president pursue an expansionary fiscal policy at the same time as the Federal Reserve pursues an expansionary monetary policy, how might the expansionary monetary policy affect the extent of crowding out in the short run?

Accepted Answer

The answer of If Congress and the president pursue an...

Question 5

To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the

Accepted Answer

Looking at the budget deficit or surplus as a percentage of GDP takes into account the size of the economy and provides a better understanding of the impact of the deficit/surplus on the overall economy. It also allows for comparison over time regardless of changes in the absolute size of the deficit/surplus.

Question 6

Historically, the largest U.S. federal budget deficits as a percentage of GDP in the 20th century occurred during

Accepted Answer

The two biggest spending events in U.S. history were World War I and World War II, and during those times there were significant budget deficits as a percentage of GDP.

Question 7

Of the $840 billion American Recovery and Reinvestment Act stimulus package which was enacted in 2009, the largest tax cuts occurred in which category?

Accepted Answer

The largest tax cuts in the stimulus package occurred in the category of individual tax cuts, with a total of $288 billion allocated towards tax relief.

Question 8

In preparing their estimates of the stimulus package's effect on GDP, Obama administration economists estimated a government purchases multiplier of 1.57. Economist Robert Barro argues that ________, the government purchases multiplier would be lower than the administration's estimate, and economists Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo argued that ________, the multiplier would be higher than the administration's estimate.

Accepted Answer

The answer of In preparing their estimates of the stimulus...

Question 9

Why will there be less crowding out of private spending by government spending the less sensitive consumption, investment, and net exports are to changes in interest rates?

Accepted Answer

The answer of Why will there be less crowding out...

Question 10

During 1970-1997, the U.S. federal government was

Accepted Answer

The answer of During 1970-1997, the U.S. federal government was
...

Question 11

In preparing their estimates of the stimulus package's effect on GDP, Obama administration economists estimated a government purchases multiplier of 1.57. This indicates that a ________ increase in government purchases would increase equilibrium real GDP by $157 billion

Accepted Answer

The government purchases multiplier of 1.57 indicates that a $1 increase in government purchases would increase equilibrium real GDP by $1.57. Therefore, a $100 billion increase in government purchases would increase equilibrium real GDP by $157 billion (100 x 1.57 = 157).

Question 12

An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

Accepted Answer

During an economic expansion, tax revenues typically increase due to higher incomes and corporate profits, while government spending on transfer payments (such as unemployment benefits) tends to decrease because more people are employed. This combination can lead to a decrease in the federal budget deficit.

Question 13

As spending on government purchases increases, income rises and money demand falls.

Accepted Answer

As spending on government purchases increases, income rises, which typically leads to an increase in money demand, not a decrease, because people need more money to carry out their increased transactions.

Question 14

Of the $840 billion American Recovery and Reinvestment Act stimulus package which was enacted in 2009, approximately one-third took the form of ________ and two-thirds took the form of increases in ________.

Accepted Answer

The question is asking about the breakdown of the $840 billion ARRA stimulus package into two forms of spending or interventions. The options A, B, and C are not relevant to the actual components of the package. Option D is the correct answer because it states that two-thirds of the money was allocated to tax cuts and one-third to government expenditures, which align with the major policy objectives of the ARRA stimulus package.

Question 15

An increase in government spending lowers interest rates and increases the rate of investment in new capital.

Accepted Answer

An increase in government spending typically raises interest rates due to higher demand for funds, which can crowd out private investment in new capital by making borrowing more expensive.

Question 16

What is meant by crowding out? Explain the difference between crowding out in the short run and in the long run.

Accepted Answer

The answer of What is meant by crowding out? Explain...

Question 17

Crowding out refers to a decrease in government purchases as a result of an increase in private expenditures.

Accepted Answer

Crowding out refers to a decrease in private expenditures as a result of an increase in government purchases, not the other way around.

Question 18

Long lags associated with the legislative process in implementing fiscal policy make it more difficult to use than monetary policy.

Accepted Answer

The legislative process for fiscal policy involves the approval of government budgets and other spending measures, which can take months or even years to pass through the necessary steps. In contrast, monetary policy decisions can be implemented relatively quickly by central banks. This lag in the legislative process makes it harder to use fiscal policy as a tool for managing the economy in a timely manner.

Question 19

Increases in government spending result in ________ in the short run, and permanent increases in government spending result in ________ in the long run.

Accepted Answer

Increases in government spending lead to partial crowding out in the short run because it increases the demand for goods and services, leading to higher prices and interest rates, reducing consumption and investment spending. However, in the long run, a permanent increase in government spending results in complete crowding out because it increases the government's demand for funds, leading to higher interest rates, which discourages private investment, thereby reducing the overall output and income.

Question 20

Explain why the timing of fiscal policy may be more difficult than the timing of monetary policy.

Accepted Answer

The answer of Explain why the timing of fiscal policy...

Quiz 27: Fiscal Policy

A recession tends to cause the federal budget deficit to because tax revenues and government spending on transfer payments .