Question 1

-Does the figure above illustrate a recessionary or an inflationary gap? What do potential GDP and real GDP equal? What is an appropriate fiscal policy to restore real GDP to potential real GDP?

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-Does the figure above illustrate a recessionary...

Question 2

"The Federal Open Market Committee (FOMC)is the group within the Federal Reserve that makes monetary policy decisions.The FOMC meets twice a year and each meeting lasts eight days." Are these two statements correct or incorrect? Why?

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Question 3

To eliminate a recessionary gap,what fiscal policy should the government pursue?

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Question 4

What are automatic stabilizers? How do they help stabilize real GDP?

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Question 5

After the Fed raises the federal funds rate,the effects on the economy can take up to two years before they occur.Is this statement accurate? Lay out the time path of how an increase in the federal funds rate affects the economy.

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Question 6

When would the Fed want to carry out a monetary policy that decreases aggregate demand?

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Question 7

Explain four reasons why it is difficult to use discretionary fiscal policy to eliminate a deflationary or inflationary gap.

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Question 8

Explain how tax revenue can be both an automatic fiscal policy and a discretionary fiscal policy.

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Question 9

If there is an inflationary gap,what is the proper monetary policy to restore price stability? What actions can the Fed undertake to restore price stability?

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Question 10

When the Fed lowers the federal funds rate and the real interest rate falls,what happens to the opportunity cost of investment? What happens to investment?

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Question 11

When the economy is in recession,does the Fed want to raise the federal funds rate so as to increase aggregate demand and increase real GDP? Explain your answer.

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Question 12

What is the effect on aggregate demand and the AD curve from either an increase in government expenditure or a cut in taxes?

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Question 13

Explain how a tax cut effects employment,labor productivity,and potential GDP.

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Question 14

What are automatic stabilizers? How do they affect the budget deficit and/or budget surplus during a recession and during an expansion?

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Question 15

An economy is experiencing a recession and policymakers are considering using discretionary fiscal policy to eliminate the recessionary gap.What are the four limitations that policymakers face when using discretionary fiscal policy? Briefly discuss each.

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Question 16

Discuss how the Fed raising the federal funds rate ripples through the different sectors of the economy.

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Question 17

What are lawmaking lags? What effect do they have on the use of discretionary fiscal policy?

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Question 18

Explain how an increase in government expenditure designed to increase aggregate demand can increase potential GDP and aggregate supply.

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Question 19

Explain the role the Fed,Congress,and the President play in making monetary policy.

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Question 20

List and briefly explain the steps in how monetary policy affects real GDP in the AS/AD model using as your example the case when the Fed eases monetary policy to fight a recession.

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Quiz 20: Fiscal Policy and Monetary Policy