Question 1

Automatic stabilizers are

Accepted Answer

Automatic stabilizers are provisions in the tax system and welfare programs that automatically kick in during times of economic downturns, increasing government spending and decreasing taxes without requiring new action by Congress or the President. Examples include unemployment benefits, which increase as more people become unemployed, and progressive income taxes, which automatically decrease as people's incomes decline.

Question 2

When there is an interval between when the fiscal policy changes and corresponding changes in aggregate spending, we have a(n)

Accepted Answer

Effect time lag refers to the time it takes for changes in fiscal policy to have an impact on aggregate spending. This lag can occur due to the time it takes for policy changes to be implemented or for individuals and businesses to adjust their behavior in response to the new policies.

Question 3

What are the various time lags that affect discretionary fiscal policy, and what are their effects?

Accepted Answer

The answer of What are the various time lags that...

Question 4

Many government programs, such as unemployment compensation, operate on a deficit during recessions and a surplus during periods of economic expansion. The programs are referred to as

Accepted Answer

Government programs that automatically increase spending during recessions and decrease spending during expansion are called automatic stabilizers. Unemployment compensation is an example of an automatic stabilizer that operates on a deficit during recessions, when more people are eligible for benefits, and on a surplus during economic expansion. Discretionary fiscal policy refers to deliberate changes in government spending or taxation to influence the economy, while Ricardian equivalence is a theory that suggests that individuals will adjust their behavior based on their expectations of future government policy, and the recognition time lag refers to the delay between the time when policymakers recognize a problem in the economy and the time when they implement a policy change to address it.

Question 5

An example of an automatic stabilizer is

Accepted Answer

Unemployment compensation is an automatic stabilizer because it automatically increases during times of economic downturn when more people lose their jobs, which provides a financial safety net and stimulates consumer spending. Similarly, it automatically decreases during times of economic growth when fewer people are unemployed. The other options are either discretionary fiscal policies, such as a surtax or an increase in government spending, or a monetary policy rule, such as a constant money supply, which are not automatic stabilizers.

Question 6

A recession begins in January but government policy makers do NOT reach a consensus that a recession had in fact begun until June. This is an example of a(n)

Accepted Answer

This is an example of a recognition time lag, since it took government policy makers six months to recognize that a recession had begun.

Question 7

In the United States economy, the progressive income tax and unemployment compensation are both

Accepted Answer

Progressive income tax and unemployment compensation are both automatic stabilizers in the US economy. Progressive income tax means that as people earn more income, they pay a higher percentage of it in taxes. During an economic downturn, when people's incomes decrease, the amount they pay in taxes also decreases, which helps to stimulate the economy. Unemployment compensation provides a safety net for individuals who have lost their jobs, which helps to stabilize their income and limit the negative effects of unemployment on the overall economy. Both of these policies work automatically to stabilize the economy without the need for discretionary action from the government.

Question 8

-Refer to the above figure. A budget deficit occurs when real national income is

Accepted Answer

A budget deficit occurs when government spending exceeds tax revenue. At Y1, government spending is greater than tax revenue, so there is a budget deficit.

Question 9

Provisions that cause changes in government spending and taxes that do NOT require action of the President or Congress are called

Accepted Answer

Provisions that cause changes in government spending and taxes without requiring action from the President or Congress are known as automatic stabilizers. These provisions are built into the tax and transfer system and react to changes in economic conditions, such as increased unemployment or a recession. They help stabilize the economy without relying on discretionary fiscal policy, which requires deliberate action from policymakers.

Question 10

When fiscal policy is used, time lags are variable and last anywhere from

Accepted Answer

Fiscal policy involves government spending and taxation decisions, which can take a significant amount of time to implement and for their effects to be fully realized in the economy, often ranging from one to three years.

Question 11

The existence of automatic stabilizers will

Accepted Answer

Automatic stabilizers are government policies that automatically stabilize economic fluctuations through changes in government spending or taxes. This means that during a recession, automatic stabilizers increase government spending (such as unemployment benefits) and decrease taxes (such as income tax) which helps to reduce the size of the recessionary gap. Conversely, during an inflationary period, the opposite happens where government spending decreases and taxes increase, which helps to reduce the size of the inflationary gap. Therefore, automatic stabilizers reduce the size of recessionary and inflationary gaps.

Question 12

Unemployment compensation programs are called automatic stabilizers because payments increase during

Accepted Answer

Unemployment compensation programs are considered automatic stabilizers because they automatically increase payments during periods of high unemployment, which typically occur during economic downturns or recessions, providing a cushion to the economy by supporting consumer spending.

Question 13

One characteristic of automatic stabilizers is that

Accepted Answer

Automatic stabilizers are economic policies and programs designed to offset fluctuations in a nation's economic activity without intervention by the government or policymakers. They work automatically and require no new legislative action by the government to have an effect. For example, during a recession, automatic stabilizers like unemployment insurance and progressive income tax reduce the budget deficit and stimulate economic activity.

Question 14

-Refer to the above figure. As the real national income expands from Y2 to Y3,

Accepted Answer

As real national income expands from Y2 to Y3, tax revenues increase due to higher income and economic activity, leading to a budget surplus if government spending does not increase at the same pace.

Question 15

When it takes time for the president and Congress to change fiscal policy to act on economic data, we have a(n)

Accepted Answer

An action time lag refers to the time it takes for policymakers, such as the president and Congress, to implement changes to fiscal policy based on economic data. This lag can result in delayed responses to economic changes, which can have consequences for the overall economy. The other options - aggregate time lag, recognition time lag, and effect time lag - are related to different aspects of the time it takes for economic policy to have an impact, but do not directly relate to the delay in policymakers taking action.

Question 16

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Unemployment benefits automatically increase when the economy worsens, providing a stabilizing effect without new legislation.

Question 17

Fiscal policy time lags tend to be

Accepted Answer

Fiscal policy time lags are variable due to the time it takes for policy changes to be debated, implemented, and to have an effect on the economy. This process can take anywhere from one to three years, depending on the specific circumstances and the efficiency of the government's response.

Question 18

An advantage of automatic stabilizers over discretionary fiscal policy is that

Accepted Answer

Automatic stabilizers do not require any legislative action, unlike discretionary fiscal policy, which requires Congress to pass new laws. As a result, automatic stabilizers are not subject to the same time lags as discretionary fiscal policy, which can take months or even years to implement. Because the effects of automatic stabilizers are automatic and immediate, they can help reduce the severity of economic downturns without the need for policymakers to take specific action.

Question 19

When real Gross Domestic Product (GDP) falls, which of the following will automatically occur?

Accepted Answer

When real GDP falls, it typically indicates that the economy is producing less and people are earning less. Therefore, income tax revenues are likely to decrease because people are making and spending less money. This would make option D incorrect. Additionally, there is no automatic correlation between real GDP and tax rates, so option A is also incorrect. Finally, a decrease in real GDP often leads to higher unemployment, which means that the government may need to spend more on unemployment compensation, making option C incorrect.

Question 20

All of the following are automatic fiscal stabilizers EXCEPT

Accepted Answer

Automatic fiscal stabilizers are government spending and taxation policies that automatically adjust to stabilize the economy without the need for additional government action. Option A suggests a congressionally mandated decrease in tax rates, which would require an active decision from the government and is not an automatic stabilizer. Options B, C, and D all involve automatic adjustment in spending and taxation based on economic conditions.

Quiz 13: Fiscal Policy