Fiscal Policy: Quiz

Suppose the economy is in equilibrium at point B which is below the full-employment output of point D. If the government implements fiscal policy targeted at moving real GDP back to point D, but crowding out significantly reduces the effectiveness of the fiscal policy, the equilibrium point will likely end up closer to point

C.

Unemployment compensation is

an automatic stabilizer because it falls as income increases, slowing an economic expansion.

If government finances fiscal policy through additional borrowing, it could affect the loanable funds market by causing

an increase in the demand and an increase in the quantity supplied for loanable funds.

In the diagram, Y* is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to

increase government purchases or reduce taxes.

The time that elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n)

recognition lag.

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net exports = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

A decrease in government purchases and an increase in taxes

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion, (2) investment = $40 billion, (3) government purchases = $90 billion, and (4) net exports = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

An increase in government purchases and a decrease in taxes

The economy is at equilibrium at point B. What would expansionary fiscal policy do?

Move the economy from point B towards point A.

The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation?

Shift aggregate demand by increasing taxes.

The lag between the time that the need for fiscal action is recognized and the time action is actually taken is referred to as the

legislative lag.

Contractionary fiscal policy tends to ________ consumption because it may reduce ________

reduce; disposable income.

If the economy falls into a recession, automatic stabilizers will cause

tax receipts to fall and government spending to rise.

Which of the following serves as an automatic stabilizer in the economy?

the progressive income tax