Question 1

During which time should the multiplier be largest?

Accepted Answer

During times of war, governments often increase spending significantly to support the war effort, which can lead to a larger multiplier effect as the increased government spending circulates through the economy.

Question 2

The period between the recognition of a problem and the implementation of a policy to solve the problem is

Accepted Answer

The period between the recognition of a problem and the implementation of a policy to solve the problem is called the action time lag. This lag can be caused by various factors such as bureaucratic processes, political considerations or logistical issues.

Question 3

Automatic stabilizers are

Accepted Answer

Automatic stabilizers are provisions built into a country's economic system that help stabilize the economy during times of economic downturns without requiring explicit government action. These stabilizers include progressive income taxes, unemployment insurance benefits, and welfare programs, among others. They work by automatically increasing government spending and decreasing taxes during recessions and decreasing government spending and increasing taxes during economic booms, thus helping to smooth out the business cycle. Importantly, automatic stabilizers do not require action by Parliament, as they are already built into the system.

Question 4

Automatic stabilizers

Accepted Answer

Automatic stabilizers are features of the fiscal system that moderate changes in disposable income that result from changes in overall business activity, without requiring explicit changes in taxes or spending by policymakers. They help stabilize the economy during periods of economic contraction or expansion, without the need for discretionary fiscal policy actions that can suffer from delays and implementation lags.

Question 5

A bill is submitted to Parliament in January 2001 that is designed to stimulate the economy and increase employment.The legislation is passed in September 2001,and the spending occurs from October 2001 to March 2002.Consequently

Accepted Answer

The time lag between the implementation of the fiscal policy and its full effect on the economy is known as the effect time lag. In this case, the spending occurs from October 2001 to March 2002, and the full effect of the policy change is not expected until after March 2002 due to this time lag.

Question 6

Figure 11-3 
-As the economy expands from Y₂ to Y₃ in Figure 11-3,

Accepted Answer

As the economy expands, tax revenues typically increase due to higher incomes and spending, potentially leading to a budget surplus if government spending does not increase proportionally.

Question 7

When national income falls,which of the following will automatically occur?

Accepted Answer

When national income falls, tax revenues will also decrease as there is less economic activity to tax. The other choices do not necessarily follow from a fall in national income.

Question 8

Fiscal policy may end up being destabilizing to an economy because

Accepted Answer

Fiscal policy involves making changes to government spending and taxation, which can take time to implement and affect the economy. This is known as time lags, and they can make the policy changes ineffective or even destabilizing if they come too late or if they are implemented when the economy is already at full employment. Additionally, if the goals of the Prime Minister and Parliament differ, it could lead to conflicting fiscal policies that could also be destabilizing.

Question 9

An advantage of automatic stabilizers over discretionary fiscal policy is that

Accepted Answer

Automatic stabilizers are built into the economy and operate automatically in response to changes in economic conditions. They are not subject to the same time lags as discretionary fiscal policy, which requires action from the government and may take time to implement. This makes automatic stabilizers more effective in providing timely support to the economy during economic downturns.

Question 10

In the Canadian economy,the progressive income tax and employment insurance are both

Accepted Answer

The progressive income tax and employment insurance are both automatic stabilizers in the Canadian economy. The progressive income tax ensures that those with higher incomes pay a larger proportion of their income in taxes, which helps to redistribute income and reduce income inequality. During a recession, when incomes and tax revenues fall, the proportion of tax revenues collected from those with higher incomes automatically increases and helps to stabilize government revenue. Employment insurance provides income support to workers who lose their jobs and contributes to stabilizing consumption during a recession. When more people lose their jobs, more people are eligible for employment insurance benefits, which helps to stabilize their income and maintain consumption levels. Therefore, both the progressive income tax and employment insurance are automatic stabilizers in the Canadian economy.

Question 11

Multiplier effects take time to work through the economy,which is known as the

Accepted Answer

The time it takes for the multiplier effect to work through the economy is known as the effect time lag. This is because there is often a delay between the initial injection of money or stimulus and the resulting ripple effects that reach the wider economy. The action time lag refers to the delay between the decision to take action and the implementation of that action, while recognition time lag refers to the delay between the emergence of an economic problem and the recognition of that problem by policymakers. Ricardian-equivalence time lag is not a commonly recognized term in economics.

Question 12

A recent government proposal to increase marginal tax rates on the wealthiest 2 percent of Canadians is supposed to generate an additional $100 million in tax revenues.It is likely that

Accepted Answer

The proposal to increase marginal tax rates on the wealthiest 2 percent of Canadians may lead some of them to respond by working less and making less income that can be taxed. This is called the substitution effect, where individuals reduce their work effort as the return on work decreases due to higher taxes. Therefore, the actual revenue raised may be less than $100 million.

Question 13

The effect time lag of fiscal policy refers to

Accepted Answer

The effect time lag of fiscal policy refers to the time that elapses between the onset of a policy and the results of that policy on the economy. This lag is caused by the time it takes for the policy to be implemented and for the effects to be felt in the economy. It can take several months or even years before the full impact of a fiscal policy is seen. This lag can make it difficult for policymakers to respond quickly to economic problems.

Question 14

We know that discretionary fiscal policy

Accepted Answer

Discretionary fiscal policy is most effective during abnormal times, such as during a recession or a period of high inflation. During normal times, changes in government spending or taxation may have less impact on the overall economy. However, during a recession, fiscal policy can be used to stimulate demand and boost economic activity, while during periods of high inflation, fiscal policy can be used to reduce demand and control price levels. Therefore, option D is the best choice.

Question 15

Suppose there are two policy options facing a vote in Parliament.In the first,government spending will increase $50 billion,while the second option is to cut taxes by $50 billion.A Keynesian economist would argue for

Accepted Answer

A Keynesian economist would argue for the spending option because it has a bigger impact on total spending. The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier. The Keynesian theory states that during a recession, an increase in government spending can boost demand and stimulate economic growth, leading to job creation and increased consumer spending. Cutting taxes may also boost spending, but it depends on how individuals and businesses choose to use their extra income. Therefore, a Keynesian economist would argue that the spending option is the best choice.

Question 16

The net export effect occurs when

Accepted Answer

The net export effect occurs when expansionary fiscal policy (increased government spending and/or tax cuts) causes increased borrowing by the government, which can lead to a change in the exchange rate. A depreciation of the domestic currency due to increased borrowing leads to lower net exports since foreign goods become relatively more expensive and domestic goods become relatively less expensive.

Question 17

One characteristic of built-in or automatic stabilizers is that

Accepted Answer

Built-in or automatic stabilizers are designed to automatically stabilize the economy during times of economic fluctuation without any legislative action required. For example, in times of recession, there is an automatic increase in government spending on unemployment benefits and a decrease in tax revenue due to lower incomes. This helps to mitigate the effects of a recession without any new legislation being passed.

Question 18

The various time lags involved with fiscal policy imply that

Accepted Answer

Fiscal policy involves government spending and taxation decisions, which often take time to implement and for their effects to be felt in the economy. By the time these effects are realized, the economic conditions that warranted the policy changes may have already shifted, potentially leading to destabilizing effects rather than stabilizing the economy as intended.

Question 19

The time that is required to collect information about the current state of the economy is known as the

Accepted Answer

The recognition time lag refers to the time it takes for policymakers to gather and analyze economic data to determine the current state of the economy. This lag can be influenced by factors such as data availability, data accuracy, and data interpretation. Once this information is collected, policymakers can then take action (action time lag) by implementing policies based on their analysis. The effect time lag refers to the time it takes for these policies to have an impact on the economy, while the fiscal lag refers specifically to the time it takes for fiscal policy tools (such as taxation and government spending) to be implemented.

Question 20

An example of an automatic stabilizer is

Accepted Answer

Unemployment compensation is an example of an automatic stabilizer because it provides income to workers who have lost their jobs due to economic downturns, thereby increasing their spending power and stimulating aggregate demand. This helps to offset the negative effects of a recession on output and employment levels. Conversely, during times of economic growth, the need for unemployment compensation decreases, reducing the government's spending on this program and helping to prevent inflationary pressures from building up in the economy.

Quiz 11: Fiscal Policy and the Public Debt