Question 1

Many economists believe that the most harmful consequence of continuing to finance high budget deficits through borrowing is the upward pressure placed on interest rates.Explain this argument.(That is,explain why higher budget deficits may lead to higher interest rates and why this may be detrimental to the economy in the long run. )

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Question 2

Explain the difference between a tax cut and a tax rebate.

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Question 3

Is fiscal policy effective in reducing both inflation and unemployment at the same time?

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Question 4

According to the AD-AS model,the economy always returns to its long-run potential growth rate in the long run.Why then should government intervene and do anything when the economy suffers a negative aggregate demand shock and falls into a recession?

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Question 5

What,if any,timing challenges exist with the use of discretionary fiscal policy? If there are any,compare and contrast them with the timing challenges of monetary policy.

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Question 6

Identify and explain the lags relevant to the use of fiscal policy.

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Question 7

Explain the dilemma policymakers face with respect to fiscal policy when government deficits and the national debt reach burdensome levels.

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Question 8

Explain why a negative real shock followed by an increase in government spending will lead to higher inflation.

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Question 9

Explain the multiplier effect.

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Question 10

Discuss the four major limits to fiscal policy.

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Quiz 18: Fiscal Policy