Podcast
Questions and Answers
Monetary policy is most accurately described as actions that influence economic activity by increasing or decreasing:
Monetary policy is most accurately described as actions that influence economic activity by increasing or decreasing:
- currency exchange rates.
- the supply of money and credit. (correct)
- tax rates on income and consumption.
Arguments for being concerned with the size of a fiscal deficit relative to GDP least likely include:
Arguments for being concerned with the size of a fiscal deficit relative to GDP least likely include:
- a high proportion of government debt owed to the country's citizens. (correct)
- higher interest rates due to government borrowing.
- a likely need for higher future taxes.
Which of the following statements about achieving proper timing in fiscal policy is least accurate?
Which of the following statements about achieving proper timing in fiscal policy is least accurate?
- Policy errors are inevitable due to unpredictable events.
- There is usually a time lag between when a change in policy is needed and when the need is recognized by policy makers.
- Improvements in quantitative methods have made the occurrence of recessions or expansions quite predictable. (correct)
The time it takes for a fiscal policy action to affect the economy is best described as:
The time it takes for a fiscal policy action to affect the economy is best described as:
Robert Necco and Nelson Packard are economists at Economic Research Associates. ERA asks Necco and Packard for their opinions about the effects of fiscal policy on real GDP for an economy currently experiencing a recession. Necco states that real GDP is likely to increase if both government spending and taxes are increased by the same amount. Packard states that if both government spending and taxes are increased by the same amount, there is no expected net effect on real GDP.
Are the statements made by Necco and Packard CORRECT?
Necco Packard
Robert Necco and Nelson Packard are economists at Economic Research Associates. ERA asks Necco and Packard for their opinions about the effects of fiscal policy on real GDP for an economy currently experiencing a recession. Necco states that real GDP is likely to increase if both government spending and taxes are increased by the same amount. Packard states that if both government spending and taxes are increased by the same amount, there is no expected net effect on real GDP.
Are the statements made by Necco and Packard CORRECT?
Necco Packard
Discretionary fiscal policy refers to:
Discretionary fiscal policy refers to:
Which of the following statements best explains the importance of the timing of changes in discretionary fiscal policy? Changes in discretionary fiscal policy must be timed properly if they are going to:
Which of the following statements best explains the importance of the timing of changes in discretionary fiscal policy? Changes in discretionary fiscal policy must be timed properly if they are going to:
The crowding-out effect suggests that:
The crowding-out effect suggests that:
An example of a contractionary fiscal policy change is a(n):
An example of a contractionary fiscal policy change is a(n):
The government budget deficit of Country M is increasing. At the same time, the government budget surplus of Country N is decreasing. Are the fiscal policies of these countries expansionary or contractionary?
The government budget deficit of Country M is increasing. At the same time, the government budget surplus of Country N is decreasing. Are the fiscal policies of these countries expansionary or contractionary?
When an economy dips into a recession, automatic stabilizers will tend to alter government spending and taxation so as to:
When an economy dips into a recession, automatic stabilizers will tend to alter government spending and taxation so as to:
A government that is implementing a contractionary fiscal policy is most likely to:
A government that is implementing a contractionary fiscal policy is most likely to:
Attempting to influence economic growth and inflation by changing tax rates and government spending is best described as:
Attempting to influence economic growth and inflation by changing tax rates and government spending is best described as:
The country of Zurkistan is experiencing both high interest rates and high inflation. The government passes laws that reduce government spending and increase taxes. It takes many months before interest rates fall and inflation is reduced. This is an example of:
The country of Zurkistan is experiencing both high interest rates and high inflation. The government passes laws that reduce government spending and increase taxes. It takes many months before interest rates fall and inflation is reduced. This is an example of:
Arguments for being concerned about the size of a fiscal deficit least likely include:
Arguments for being concerned about the size of a fiscal deficit least likely include:
Assuming the federal government maintains a balanced budget, the most likely effects of a tax increase on government expenditures and real GDP are:
Government Expenditures Real GDP
Assuming the federal government maintains a balanced budget, the most likely effects of a tax increase on government expenditures and real GDP are:
Government Expenditures Real GDP
When the central bank increases short-term interest rates, its monetary policy is best described as:
When the central bank increases short-term interest rates, its monetary policy is best described as:
Unemployment compensation is an example of:
Unemployment compensation is an example of:
Which of the following statements best explains how automatic stabilizers work? Even without a change in fiscal policy, automatic stabilizers tend to promote:
Which of the following statements best explains how automatic stabilizers work? Even without a change in fiscal policy, automatic stabilizers tend to promote:
The time it takes for policy makers to enact a fiscal policy action is best described as:
The time it takes for policy makers to enact a fiscal policy action is best described as:
A distinction between fiscal policy and monetary policy is that fiscal policy:
A distinction between fiscal policy and monetary policy is that fiscal policy:
The term "automatic stabilizers" refers to:
The term "automatic stabilizers" refers to:
The time it takes for policy makers to determine that the economy requires a fiscal policy action is best described as:
The time it takes for policy makers to determine that the economy requires a fiscal policy action is best described as:
Promoting economic growth and price stability are the goals of:
Promoting economic growth and price stability are the goals of:
Policies that can be used as tools for redistribution of wealth and income include:
Policies that can be used as tools for redistribution of wealth and income include:
Policies used with the goal of maintaining stable prices and producing economic growth include:
Policies used with the goal of maintaining stable prices and producing economic growth include:
An argument against being concerned with the size of a fiscal deficit is that a deficit can:
An argument against being concerned with the size of a fiscal deficit is that a deficit can:
The crowding-out model implies that a:
The crowding-out model implies that a:
Assuming the economy currently is experiencing high inflation, an example of appropriate discretionary fiscal policy is:
Assuming the economy currently is experiencing high inflation, an example of appropriate discretionary fiscal policy is:
Arguments against being concerned about the size of a fiscal deficit include:
Arguments against being concerned about the size of a fiscal deficit include:
Flashcards
Monetary Policy
Monetary Policy
Actions that influence economic activity by increasing or decreasing the money supply and availability of credit.
Crowding-Out Effect
Crowding-Out Effect
Occurs when government borrowing increases interest rates, reducing private investment.
Discretionary Fiscal Policy
Discretionary Fiscal Policy
Active government decisions on spending and taxing to affect economic growth.
Timing of Discretionary Fiscal Policy
Timing of Discretionary Fiscal Policy
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Automatic Stabilizers
Automatic Stabilizers
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Fiscal Policy
Fiscal Policy
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Impact Lag
Impact Lag
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Contractionary Monetary Policy
Contractionary Monetary Policy
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Automatic Fiscal Policy Stabilizer
Automatic Fiscal Policy Stabilizer
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Action Lag
Action Lag
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Fiscal Policy
Fiscal Policy
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Fiscal Deficit Benefit
Fiscal Deficit Benefit
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Crowding-Out Effect Implication
Crowding-Out Effect Implication
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Goals of Monetary & Fiscal Policy
Goals of Monetary & Fiscal Policy
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Automatic Stabilizers Action
Automatic Stabilizers Action
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Fiscal Policy Changes
Fiscal Policy Changes
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Contractionary Fiscal Policy
Contractionary Fiscal Policy
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Tax Increase Under Budget
Tax Increase Under Budget
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Impact lag in Discretionary fiscal policy
Impact lag in Discretionary fiscal policy
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Study Notes
Monetary Policy
- Monetary policy influences economic activity by adjusting the supply of money and credit.
- The primary goal of monetary policy is to influence economic growth and inflation.
- Fiscal policy and monetary policy can influence currency exchange rates, but it is not their main focus.
Fiscal Deficit Concerns
- Concerns about fiscal deficits include the need for higher future taxes.
- Fiscal deficits can cause higher interest rates due to government borrowing.
- Fiscal deficits can potentially crowd out private investment.
- Arguments for not being concerned about fiscal deficits include a government owing its own citizens much of its outstanding debt.
Proper Timing in Fiscal Policy
- Accurately predicting recessions or expansions is a problem in achieving proper timing in fiscal policy.
Fiscal Policy Action Time Lag
- Impact lag is the time it takes for a fiscal policy action to affect the economy once implemented.
- Recognition lag is the time it takes policymakers to realize a fiscal policy response is needed.
- Action lag is the time it takes policymakers to discuss, enact, and implement fiscal policy measures.
Government Spending and Taxes
- Real GDP is likely to grow if government spending and taxes increase by the same amount.
- The multiplier effect is stronger for government expenditures versus government taxes.
- An increase in government spending combined with an equal increase in taxes leads to a net positive effect on real GDP.
Discretionary Fiscal Policy
- Active decisions regarding spending and taxing to affect economic growth are discretionary fiscal policy.
- Buying or selling securities in the open market to influence interest rates is monetary policy.
- Automatic stabilizers differ from discretionary fiscal policy, as the latter refers to active decisions by the government to affect economic growth through changes in government spending and taxation.
Timing of Discretionary Fiscal Policy
- Discretionary policy needs to be timed properly to reduce economic instability.
- Fiscal policy change could increase, rather than reduce, economic instability if timed incorrectly.
Crowding-Out Effect
- The crowding-out effect suggests that greater government deficits will drive up interest rates.
- The crowding-out effect reduces private investment.
- The result of the crowding-out effect is a reduction in private borrowing and investment as a result of higher interest rates generated by budget deficits that are financed by borrowing.
Contractionary Fiscal Policy
- An increase in a fiscal surplus is an example of a contractionary fiscal policy change.
- A decrease in a fiscal deficit is also an example of a contractionary fiscal policy change.
- An increase in a fiscal deficit or a decrease in a fiscal surplus is expansionary.
- Contractionary fiscal policy decreases a budget deficit or increases a budget surplus.
- Expansionary fiscal policy increases a budget deficit or decreases a budget surplus.
Automatic Stabilizers
- Automatic stabilizers tend to enlarge the budget deficit (or reduce the surplus) when an economy dips into a recession.
- During a recession, the government will pay out more in unemployment compensation as tax receipts fall, due to high unemployment and low tax receipts from corporations and individuals.
- This increases the deficit size and maintains aggregate demand during recessionary periods.
Contractionary Fiscal Policy Implementation
- Decreasing transfer payments to households will implement a contractionary fiscal policy
- Increasing spending is expansionary.
- Decreasing taxes are expansionary.
Fiscal Policy Actions
- Actions by a government to influence economic activity through changes in taxes and government spending is fiscal policy.
Impact Lag
- A reduction in government spending and an increase in taxes may take months before interest rates fall and inflation is reduced.
- The events described demonstrate discretionary fiscal policy involving impact lag.
- Impact lag occurs because it takes time for the change's impact in taxing and spending to be felt throughout the economy.
Fiscal Deficit Size
- If Ricardian equivalence holds, private savings will increase in anticipation of the future taxes required by a fiscal deficit.
- Ricardian equivalence is an argument against being concerned about the size of a fiscal deficit
- Reducing long-term economic growth due to higher future taxes argues in favor of being concerned about the size of a fiscal deficit.
- The crowding-out effect of government borrowing on private investment is an argument in favor of being concerned about the size of a fiscal deficit.
Balanced Budget Multiplier
- The multiplier effect is stronger for government spending versus the tax increase when a federal government maintains a balanced budget.
- All of the government spending enters the economy as increased expenditure.
- Only a portion of the tax increase results in lessened expenditure, with the rest from savings.
- An increase in both government expenditures and real GDP is the likely effects of a tax increase.
Monetary Policy Rates
- When the central bank increases short-term interest rates, its monetary policy is contractionary or tight.
- Accommodative or expansionary monetary policy attempts to increase the growth rate of money and credit.
- Contractionary monetary policy attempts to decrease the growth rate of money and credit.
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