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Exam 11: Fiscal Policy

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Question 71

Multiple Choice

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From a Keynesian perspective,the way out of recession is to

A) Wait for the economy to fix itself.
B) Use monetary restraint.
C) Get consumers to spend less on goods and services.
D) Get consumers to spend more on goods and services.

E) B) and C)
F) C) and D)

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Question 72

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If the economy has an inflationary GDP gap,one possible solution is to increase government expenditures. Fiscal restraint is tax hikes or spending cuts intended to reduce (shift)aggregate demand.

A) True
B) False

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Question 73

Multiple Choice

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Which of the following is an income transfer?

Refer to Figure 11.3.Assume aggregate demand is represented by AD₁ and full-employment output is $5.6 trillion.If aggregate demand decreases by the amount of the GDP gap,equilibrium will occur at

The statement "balancing the budget on the backs of the poor" refers to

Prior to 1913,most of the federal government's tax revenues came from

Which of the following would not be a policy option to eliminate an AD shortfall?

Time lags in the design,authorization,and implementation of fiscal policy reduce its effectiveness. In the time it takes for fiscal policy to take effect,the economy could begin to improve on its own due to other internal or external shocks that may have occurred.

Fiscal policy changes in government spending and taxes primarily target the aggregate supply curve. The federal government's tax and spending powers give it a great deal of influence over aggregate demand.The government can alter aggregate demand by purchasing more or fewer goods and services,raising or lowering taxes,and changing the level of income transfers.These tools primarily impact the aggregate demand,not the aggregate supply.

Payments for unemployment benefits sent to unemployed people are considered government purchases. Income transfers,not government purchases,are payments to individuals for which no current goods or services are exchanged,such as Social Security,welfare,and unemployment benefits.

The recessionary GDP gap will differ from the AD shortfall when the

Using Figure 11.1,which fiscal policy action would increase aggregate demand from AD₁ to AD₃?

Assume the MPC is 0.80.If the government wants to eliminate an AD shortfall of $300 billion,it should

An investment tax credit creates jobs mostly for the year in which it is granted. A tax cut may also be an effective mechanism for increasing investment spending.Once additional investment spending enters the circular flow,it too has a multiplier effect.

If the GDP gap is $400 billion and AS is upward-sloping,an effective fiscal policy would be to increase aggregate demand by $400 billion. With an upward-sloping aggregate supply curve,if aggregate demand increased by the amount of the recessionary GDP gap,the economy would fall short of full employment.Some of the increased demand pushes up prices instead of output.To reach full-employment equilibrium,the AD curve must shift by an amount greater than the GDP gap,the amount of the entire AD shortfall.

Refer to Figure 11.1.Assume aggregate demand is represented by AD₁ and full-employment output is $6.0 trillion.The economy confronts a real GDP gap of

Fiscal policy formation causes a delay in implementation even though a recession can usually be recognized within a few weeks after it begins. A limitation on fiscal policy is time.In the real world it takes time to recognize that the economy is in trouble.A blip in the unemployment or inflation rate may not signal a trend.Before intervening,we may want to be more certain that a recessionary or inflationary GDP gap is emerging.

Which of the following is a policy option to eliminate an AD shortfall?

Which of the following formulas is used to find the cumulative increase in AD from a particular fiscal stimulus?

The desired fiscal restraint is equal to