Questions and Answers
Which of the following would be classified as fiscal policy?
What is an objective of fiscal policy?
High rates of economic growth.
The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of?
Automatic stabilizers.
Which of the following would not be considered an automatic stabilizer?
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Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________.
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Fiscal policy is determined by?
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Expansionary fiscal policy involves?
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Which of the following is considered contractionary fiscal policy?
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If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply?
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Decreasing government spending ________ the price level and ________ equilibrium real GDP.
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The problem causing most recessions is too little?
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From an initial long-run equilibrium, if aggregate demand grows more slowly than long-run and short-run aggregate supply, then Congress and the president would most likely?
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Which of the following would be most likely to induce Congress and the president to conduct expansionary fiscal policy?
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Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
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Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the?
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The aggregate demand curve will shift to the right ________ the initial increase in government purchases.
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The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the?
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Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP?
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The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because?
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The crowding out effect will be greater the?
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If government expenditures increase, then in the long run?
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Following a decrease in government spending, as the price level falls we would expect the level of interest rates to ________ and investment to ________.
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Study Notes
Fiscal Policy
- Fiscal policy involves government actions, specifically tax and spending changes, to influence the economy.
- Objectives of fiscal policy include promoting high economic growth and stabilizing economic fluctuations.
Automatic Stabilizers
- Automatic stabilizers are fiscal mechanisms that adjust taxes based on economic performance, increasing during expansions and decreasing during recessions.
- Not all changes are automatic; legislation (like funding for job retraining) passed during recessions is considered discretionary.
Discretionary vs. Automatic
- Discretionary fiscal policy involves active changes in government spending or taxation to stabilize the economy.
- Automatic stabilizers function passively, changing in response to economic conditions without new legislation.
Effects of Fiscal Policy
- Expansionary fiscal policy aims to stimulate the economy through increased government spending or tax cuts.
- Contractionary fiscal policy restricts growth by increasing taxes or decreasing government spending.
Economic Adjustments
- To correct an economy growing beyond potential GDP, increasing taxes is an appropriate measure.
- Reducing government spending generally decreases both the price level and equilibrium real GDP.
Recessionary Causes
- Recessions are often attributed to insufficient spending in the economy.
- If aggregate demand fails to keep pace with aggregate supply, tax reductions are likely to be considered by policymakers.
Investment and Policy Response
- A significant drop in investment spending could prompt Congress and the president to adopt expansionary fiscal measures.
- Contractionary fiscal actions would result in a reduced inflation rate and lower real GDP.
Consumption and the Multiplier Effect
- The multiplier effect describes how initial increases in spending can lead to greater overall consumption increases within the economy.
Government Purchases Multiplier
- The tax multiplier is typically smaller than the government purchases multiplier because some of the tax reductions are saved rather than spent.
Balanced Budget Impact
- If Congress raises spending and taxes equally, such as $100 billion each, real equilibrium GDP will still rise due to the additional economic activity generated by spending.
The Federal Reserve's Role
- The Federal Reserve is more agile than Congress and the president in implementing monetary policy, playing a crucial role in stabilizing the economy.
Crowding Out Effect
- The crowding out effect indicates that increased government spending can lead to higher interest rates, which may deter private investment, especially when investments are sensitive to interest rate changes.
Long-Term Implications
- Increased government spending can lead to higher long-term interest rates, which subsequently lowers consumption and investment levels.
Response to Spending Cuts
- A reduction in government spending is expected to lower price levels, which in turn would lead to decreased interest rates and increased investment activity.
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Description
This quiz focuses on fiscal policy concepts and definitions from Chapter 16. It includes questions on government tax policies and their role in stimulating economic growth. Test your understanding of key terms and objectives related to fiscal policy.
