ECON CH.18

Which statement is TRUE? Counter-cyclical fiscal policy is fiscal policy that runs with the business cycle. The "common sense" view of fiscal policy is that the government should spend less in good economic times and more in bad economic times. Argentina's experience from 1999 to 2002 is an example that expansionary fiscal policy can lower real growth. Discretionary stabilizers are changes in fiscal policy that stimulate aggregate demand in a recession without the need for explicit action by policymakers.

Argentina's experience from 1999 to 2002 is an example that expansionary fiscal policy can lower real growth. **The Argentine government could not pay off debts incurred from continual fiscal policy expansion, leading to the largest default by a government in the history of the world.

What impact do automatic stabilizers have on aggregate demand? Automatic stabilizers theoretically help keep aggregate demand steady, but in practice the overall impact is insignificant. Automatic stabilizers keep aggregate demand steady. Automatic stabilizers have no effect at all on aggregate demand. Automatic stabilizers magnify shifts of AD away from a steady and regular course.

Automatic stabilizers keep aggregate demand steady. **Automatic stabilizers are changes in fiscal policy that stimulate AD in a recession without the need for explicit action by policymakers.

How does crowding out influence the effectiveness of fiscal policy? Crowding out has no effect on fiscal policy. Crowding out increases the effectives of fiscal policy. Crowding out increases the effectiveness of fiscal policy to fight a recession but decreases the effectiveness of fiscal policy to fight inflation. Crowding out reduces the effectiveness of fiscal policy.

Crowding out reduces the effectiveness of fiscal policy. *Crowding out is the decrease in private spending that occurs when government increases spending

Which statement is TRUE? Fiscal policy is much more likely to be successful when the multiplier is big than when it is small. If the government cuts taxes on people who want to buy what unemployed workers produce, the multiplier will be small. Ricardian equivalence refers to the situation people do not save their tax cuts and spend them instead, causing the aggregate demand curve to shift right and inflate the multiplier. The fundamental reason that fiscal policy can work is that when resources are unemployed, the economy is operating efficiently.

Fiscal policy is much more likely to be successful when the multiplier is big than when it is small.

Which statement is FALSE? Automatic stabilizers can help to stabilize aggregate demand. Unemployment insurance is an example of an automatic stabilizer. Governments often prefer to spend less in bad times and more in good times. Ideal fiscal policy is counter-cyclical.

Governments often prefer to spend less in bad times and more in good times. **Governments often prefer to spend more in bad times and good times.

Which statement is FALSE? Governments often prefer to spend more in bad times and more in good times. Automatic stabilizers can help to stabilize aggregate demand. Unemployment insurance is an example of an automatic stabilizer. Ideal fiscal policy is cyclical.

Ideal fiscal policy is cyclical. **It is counter-cyclical.

Which, if true, would strengthen the case for using fiscal policy to fight a recession? There are many automatic stabilizers in place. The recession is not so great as to warrant risks to long-term growth. The recession was caused by a negative real shock. Many resources are unemployed.

Many resources are unemployed. **Fiscal policy is most likely to be a good idea when the economy needs a short-run boost, even at the expense of the long run; when the problem is a deficiency in aggregate demand rather than a real shock; and when many resources are unemployed.

Which statement is FALSE? One complication of fiscal policy is that once in place, macroeconomic conditions may have changed entirely. The recognition lag stems from the fact that it takes time to recognize an economic problem exists. One example of an automatic stabilizer is when people save during good economic times and use those savings during bad economic times. Monetary policy is also subject to lags, but these are generally longer than for fiscal policy.

Monetary policy is also subject to lags, but these are generally longer than for fiscal policy. **Monetary policy lags tend to be smaller than those associated with fiscal policy.

Which statement is TRUE? One benefit of fiscal policy is that once in place, macroeconomic conditions may have changed entirely. Monetary policy is also subject to lags, but these are generally shorter than for fiscal policy. The legislative lag stems from the fact that it takes time to recognize an economic problem exists. One example of an automatic stabilizer is when people save during bad economic times and use those savings during good economic times.

Monetary policy is also subject to lags, but these are generally shorter than for fiscal policy. **Monetary policy lags tend to be smaller than those associated with fiscal policy.

Which statement is TRUE? One example of an automatic stabilizer is when people save during good economic times and use those savings during bad economic times. Monetary policy is also subject to lags, but these are generally longer than for fiscal policy. The legislative lag stems from the fact that it takes time to recognize an economic problem exists. One benefit of fiscal policy is that once in place, macroeconomic conditions may have changed entirely.

One example of an automatic stabilizer is when people save during good economic times and use those savings during bad economic times.

Which, if true, would NOT strengthen the case for using fiscal policy to fight a recession? The economy needs a long-run boost, even at the expense of a short-run cost. Capital utilization rates are high. There is not likely to be significant crowding out. The recession was caused by a deficiency in aggregate demand.

The economy needs a long-run boost, even at the expense of a short-run cost. **Fiscal policy is most likely to be a good idea when the economy needs a short-run boost, even at the expense of the long run; when the problem is a deficiency in aggregate demand rather than a real shock; and when many resources are unemployed.

Which statement is FALSE? One example of an automatic stabilizer is when people save during good economic times and use those savings during bad economic times. Monetary policy is also subject to lags, but these are generally shorter than for fiscal policy. One complication of fiscal policy is that once in place, macroeconomic conditions may have changed entirely. The legislative lag stems from the fact that it takes time to recognize an economic problem exists.

The legislative lag stems from the fact that it takes time to recognize an economic problem exists. **This is the definition of the recognition lag.

With respect to the American Recovery and Reinvestment Act, which is TRUE? The majority of the tax cuts in the United States did not reemploy a lot of workers. The majority of the tax cuts in the United States were spent. The tax cuts in the United States boosted economic security for everyone. The tax cuts in the United States were associated with a large multiplier effect.

The majority of the tax cuts in the United States did not reemploy a lot of workers. **Since the tax cuts weren't spent, they did not lead to a lot of reemployed workers.

With respect to the American Recovery and Reinvestment Act, which is TRUE? The tax cuts in the United States were associated with a large multiplier effect. The tax cuts in the United States boosted economic security for everyone. The majority of the tax cuts in the United States were used to pay off debt. The majority of the tax cuts in the United States were spent.

The majority of the tax cuts in the United States were used to pay off debt. **The majority of tax cuts were saved or used to pay off debt.

Which statement is TRUE? One example of an automatic stabilizer is when people save during bad economic times and use those savings during good economic times. Monetary policy is also subject to lags, but these are generally longer than for fiscal policy. The recognition lag stems from the fact that it takes time to recognize an economic problem exists. One benefit of fiscal policy is that once in place, macroeconomic conditions may have changed entirely.

The recognition lag stems from the fact that it takes time to recognize an economic problem exists. **This is the definition of the recognition lag.

With respect to the American Recovery and Reinvestment Act, which is TRUE? The tax cuts in the United States were associated with a small multiplier effect. The tax cuts in the United States boosted economic security for everyone. The majority of the tax cuts in the United States were spent. The majority of the tax cuts in the United States reemployed a lot of workers.

The tax cuts in the United States were associated with a small multiplier effect. **The majority of tax cuts were not associated with a large multiplier effect since much of the tax cuts were not spent but saved or used to pay off debt.

Suppose that Congress has received some troubling data on the economy and wants to pass a stimulus package. However, the economic benefit of this is stalled due to political grandstanding and bickering between parties. Which statement is TRUE? This is a case of an effectiveness lag. This is a case of a legislative lag. This is a case of a recognition lag. This is a case of an evaluation and adjustment lag.

This is a case of a legislative lag. **The legislative lag is due to the fact that Congress must propose and pass a plan.

All else equal, a decrease in the growth rate in the velocity of money caused by a decrease in household consumption will in the short run cause: a decrease in inflation and a decrease in real growth. decreases in the growth rate of the money supply, inflation, and real growth. a decrease in inflation. an increase in the growth rate of the money supply.

a decrease in inflation and a decrease in real growth. **This is because prices and wages are sticky.

With respect to the American Recovery and Reinvestment Act, there seems to be a consensus that: the states have learned to identify other sources of revenue rather than relying on the federal government. the grants to the states were insufficient to prevent state government layoffs. a lot of the tax cuts were saved rather than spent. the spending directly targeted exactly those workers facing unemployment.

a lot of the tax cuts were saved rather than spent. **This boosted economic security for some people but didn't reemploy a lot of workers.

Imagine that the government has identified that the country is in a recession, and it concludes that sending a tax rebate check to all citizens would be an effective way to combat the problem. However, when the people receive their checks, they do not immediately spend them, choosing instead to delay consumption until economic conditions improve. This is a demonstration of: a legislative lag. an effectiveness lag. a recognition lag. an implementation lag.

an effectiveness lag. **Government expenditures can take years to move from dream to reality, yet fiscal policy is often intended to correct short-term problems.

Suppose the growth rate of consumption falls by x% and an increase in government spending of y% is able to exactly offset it and restore aggregate demand to its original level. If x is greater than y, the increase in the growth rate of government spending led to: an increase in the growth rate of the money supply. a decrease in the growth rate of the money supply. a decrease in the growth rate of consumption. an increase in the growth rate of consumption.

an increase in the growth rate of consumption. **This is the multiplier effect at work.

In extreme situations, debt can be such a significant problem that expansionary fiscal policy: can reduce real growth. must be used to restore credibility. increases real growth too quickly. leads to inflation.

can reduce real growth. **The case of Argentina is discussed in the textbook.

The decrease in private spending that occurs when government increases spending is called: the automatic stabilizer. crowding out. the multiplier effect. inverted investing.

crowding out. **Crowding out means that an initial shift in AD is less than the amount of new government spending.

With respect to the American Recovery and Reinvestment Act, there seems to be a consensus that the: spending directly targeted exactly those workers facing unemployment. grants to the states caused a long-term problem by making state governments more dependent on the federal government for revenue. tax cuts greatly increased consumption rather than saving. grants to the states were insufficient to prevent state government layoffs.

grants to the states caused a long-term problem by making state governments more dependent on the federal government for revenue. **That said, these grants probably prevented a large number of state government layoffs.

With respect to the American Recovery and Reinvestment Act, there seems to be a consensus that the: grants to the states prevented a large number of state government layoffs. tax cuts greatly increased consumption rather than saving. states have learned to identify other sources of revenue rather than relying on the federal government. spending directly targeted exactly those workers facing unemployment.

grants to the states prevented a large number of state government layoffs. **However, these grants may have caused a longer-term problem by making states more dependent on the federal government for revenue.

Although ideal fiscal policy would require that governments increase and decrease spending at different times, in reality governments often find it easier to _____ than they do to _____. increase spending in bad times; increase taxes in good times increase taxes in bad times; increase spending in good times decrease spending in bad times; increase spending in good times decrease spending in bad times; decrease spending in good times

increase spending in bad times; increase taxes in good times **Ideal fiscal policy will increase AD in bad times and pay off the bill in good times.

When government debt is large, there is: more room for expansionary fiscal policy, because interest payments will remain low. less room for expansionary fiscal policy, because interest payments are low. more room for expansionary fiscal policy, because interest payments are high. less room for expansionary fiscal policy, because interest payments may be too high.

less room for expansionary fiscal policy, because interest payments may be too high. **Too high of a debt can drive a nation to ruin by undercutting the credibility of everything a government does and whether that government can meet its commitments.

Refer to the associated figure. Assume AD has increased due to an increase in wealth. What part of the graph shows the impact on the economy after a decrease in government spending to offset the increase in AD but before the multiplier takes effect? point e to a point c to d line b point a

line b **This is the intermediate position after contractionary fiscal policy has had an impact but before the multiplied has had an impact.

Refer to the associated figure. Which point represents short-run equilibrium? *see graph point a point c point d point e

point c **Point c is the short-run equilibrium after an increase in AD.

To say that demand can create its own supply is to suggest that increased: spending can lead to decreased growth. growth can lead to decreased spending. spending can lead to increased growth. growth can lead to increased spending.

spending can lead to increased growth. **An increase in government spending can put the economy back on track, bringing the growth rate back to the Solow growth rate.

Suppose that households become pessimistic and begin to cut back on their spending to build up their cash reserves. As a result, the growth rate of the _____ falls and the _____ shifts to the left. money supply; Solow growth curve money supply; aggregate demand curve velocity of money; Solow growth curve velocity of money; aggregate demand curve

velocity of money; aggregate demand curve **This decrease in aggregate demand will cause rising unemployment and falling incomes.

Suppose that households become pessimistic and begin to cut back on their spending to build up their cash reserves. As a result, the growth rate of the _____ falls and the aggregate demand curve shifts to the _____. velocity of money; right money supply; right velocity of money; left money supply; left

velocity of money; left **This decrease in aggregate demand will cause rising unemployment and falling incomes.

Fiscal policy is likely to be needed and most effective: when the problem is a real shock rather than deficiency in aggregate demand. when the economy needs a long-run boost, even at the expense of the short run. when many resources are unemployed and the fiscal stimulus can be targeted toward those unemployed resources. when government spending is inefficient and unproductive.

when many resources are unemployed and the fiscal stimulus can be targeted toward those unemployed resources.