Chapter 11

Why do long lags make discretionary policy less effective?

By the time the impact of a policy is felt, the problem may have been corrected by market forces.

Which of the following best describes the economic conditions of the 1930s?

Depressed economic conditions and prolonged high rates of unemployment

Within the framework of the Keynesian model, which of the following will occur if spending is abnormally low?

Equilibrium output will be less than the full-employment rate of output.

Which of the following is true when the federal government is running a budget deficit?

Government expenditures exceed government revenues.

Which of the following is true if the federal government is running a budget surplus?

It will be able to reduce its outstanding debt

If the government owes $10.0 trillion and then borrows $700 billion more this year, this leads to

a debt of $10.7 trillion and a deficit of $700 billion.

According to the Keynesian view, which of the following would most likely stimulate real output if an economy were in a recession?

a decrease in tax rates

The multiplier effect refers to the fact that a change in spending (aggregate demand) will

cause nominal output to rise by some multiple of the initial increase in spending

Which of the following provides the best information about the direction of the government's fiscal policy?

changes in the size of the federal government's budget deficit or surplus

If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should

decrease government spending and/or raise taxes

Changes in government spending and/or taxes as the result of legislation, is called

discretionary fiscal policy

Keynesian economists believed that the prolonged unemployment of the 1930s was the result of

insufficient aggregate demand and the failure of market forces to direct the economy back to full employment.

Keynes rejected the view that lower wages would direct a recessionary economy back to full employment because

powerful trade unions and large corporations made wages highly inflexible.

The primary tool of fiscal policy is

the federal budget.

The larger the marginal propensity to consume,

the larger the multiplier.