Fiscal Policy Question Bank and Explanations for some
What is a contractionary fiscal policy? A. Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand. B. Contractionary fiscal policy includes increasing government spending and taxes to decrease aggregate demand. C. Contractionary fiscal policy includes decreasing government spending and taxes to decrease aggregate demand. D. Contractionary fiscal policy includes increasing government spending and decreasing taxes to decrease aggregate demand.
A. Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand. Contractionary fiscal policy involves decreasing government purchases or increasing taxes. Decreasing government purchases decreases aggregate demand directly because government purchases are a component of aggregate demand. Increasing taxes decreases disposable income which, in turn, decreases consumption by households and firms.
If the equilibrium of SRAS and AD are less than potential GDP, what actions can the federal government take to move the economy back to potential GDP? A. Increase government spending or decrease taxes. B. Increase the money supply. C. Decrease government spending or increase taxes. D. Both A and B.
A. Increase government spending or decrease taxes. The government can increase spending or decrease taxes. Increasing the money supply is also expansionary, but it is done by the Fed, not the president and Congress.
Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called A. automatic stabilizers. B. transfer payments. C. monetary policy. D. discretionary fiscal policy.
A. automatic stabilizers. Automatic stabilizers Government spending and taxes that automatically increase or decrease along with the business cycle. When the economy is expanding, spending on unemployment benefits falls and tax revenue increases as a result of higher earnings. When the economy is in a recession, spending on unemployment benefits increases, and, as unemployment increases, tax revenue from payrolls declines.
Suppose that at the same time as Parliament pursues an expansionary fiscal policy, the Bank of Canada pursues an expansionary monetary policy. How might an expansionary monetary policy affect the extent of crowding out in the short run? A. An expansionary monetary policy would have no effect on the extent of crowding out. B. An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out. C. An expansionary monetary policy would only affect the extent of crowding out in the long run. D. An expansionary monetary policy would increase interest rates and thus increase the extent of crowding out.
B. An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out. An expansionary fiscal policy will by itself tend to cause the equilibrium rate of interest to increase. An expansionary monetary policy will cause the equilibrium rate of interest to decrease. An expansionary monetary policy will therefore lessen the effect of crowding out in the short run.
Proponents of government infrastructure projects often argue that government spending on building bridges to other countries will have a "ripple effect" on employment. The ripple effect meant that A. other non-construction industries would also want to share the government's stimulus money. B. the job creation would be restricted to the construction industry only as more workers would be hired by other construction companies. C. the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers. D. the income earned by the new bridge project workers would trickle down to those who would be still unemployed.
C. the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers. "ripple effect" means multiplier effect. When an increase in output and employment in one industry spreads to other industries and parts of the economy via the consumption of the workers, it is generally referred to as the "ripple effect". The new bridge to the United States in Southern Ontario project created increased income and employment in the construction and related industries and were expected to spread such gains over the rest of the economy, thus creating a "ripple effect" on income and employment.
What is the formula for Government Purchases Multiplier?
Government purchases multiplier = (∆ equilibrium rGDP) / (∆ government purchases)
Assume the tax multiplier is estimated to be 2.0 and the aggregate supply curve has its usual upward slope. Suppose the government lowers taxes by $67 million. Aggregate demand will -- by $-- million
increase, $134 million tax multiplier = (∆ equilibrium rGDP) / (∆ taxes) (tax multiplier)*(∆ taxes) = (∆ equilibrium rGDP) ∆ equilibrium rGDP = (2.0)*(67 mil) = (134 mil)
Who is responsible for fiscal policy? A. The federal government controls fiscal policy. B. The federal government and the provincial, territorial, and local governments jointly control fiscal policy. C. The provincial, territorial, and local governments control fiscal policy. D. Fiscal policy is controlled by market forces.
A. The federal government controls fiscal policy. Parliament and Provincial Legislative assemblies are responsible for fiscal policy.
The term "crowding out" refers to a situation where: A. Fed policy increases interest rates and decreases private investment. B. Fed policy decreases interest rates and increases private investment. C. Government spending increases interest rates and decreases private investment. D. Government spending decreases interest rates and increases private investment.
C. Government spending increases interest rates and decreases private investment.
According to Statistics Canada, "[b]y 2056, it is projected (based on a medium growth scenario) that there will be only 2 working-age people for every senior in Canada." - StatsCan, Demographic Change, January 14, 2010, http://www.statcan.gc.ca/pub/82-229-x/2009001/demo/int1-eng.htm Briefly explain the implications of these facts for federal government spending as a percentage of GDP in 2056. A. Without changes in government policies, this change will result in decreases in federal government transfer payments and decreases in federal tax revenues, causing government spending to become a smaller percentage of GDP. B. Without changes in government policies, this change will result in increases in federal government transfer payments and increases in federal tax revenues, causing government spending to become a larger percentage of GDP. C. Without changes in government policies, this change will result in increases in federal government transfer payments and decreases in federal tax revenues, causing government spending to become a larger percentage of GDP. D. Without changes in government policies, this change will result in decreases in federal government transfer payments and increases in federal tax revenues, causing government spending to become a smaller percentage of GDP.
C. Without changes in government policies, this change will result in increases in federal government transfer payments and decreases in federal tax revenues, causing government spending to become a larger percentage of GDP. The federal government collects taxes on incomes. The federal government supports provincial health care spending through the Canada Health Transfer, a payment program that provides money to provincial and territorial governments to pay for health care. Think about how the given facts may affect federal government spending as a percentage of GDP. Since the federal government collects taxes on incomes, if there are proportionally fewer working-age people, GDP and incomes will be lower than they would be otherwise, causing federal government tax revenues to decrease as a result of this change. The federal government supports provincial health care spending through the Canada Health Transfer, a payment program that provides money to provincial and territorial governments to pay for health care. On average, public health care spending is higher for older individuals. Therefore, if a greater proportion of Canadians are seniors, federal government transfer payments through the Canada Health Transfer will increase. Since transfer payments will increase and GDP would decrease, this change will cause government spending to become a larger percentage of GDP.
What is the difference between fiscal policy and monetary policy? Which of the following statements is most accurate regarding fiscal policy and monetary policy? A. Fiscal policy includes changes in interest rates and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and government spending and is controlled by the provincial, territorial, and local governments. Both policies are intended to achieve macroeconomic objectives. B. Fiscal policy includes changes in government spending and interest rates and is controlled by the federal government. Monetary policy includes changes in the money supply and taxes and is controlled by the Bank of Canada. Both policies are intended to achieve macroeconomic objectives. C. Fiscal policy includes changes in government spending and taxes and is controlled by the provincial, territorial, and local governments. Monetary policy includes changes in the money supply and interest rates and is controlled by the federal government. Both policies are intended to achieve macroeconomic objectives. D. Fiscal policy includes changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and interest rates and is controlled by the Bank of Canada. Both policies are intended to achieve macroeconomic objectives.
D. Fiscal policy includes changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and interest rates and is controlled by the Bank of Canada. Both policies are intended to achieve macroeconomic objectives. Fiscal policy involves changes in government purchases and taxes and is controlled by the federal government. Monetary policy involves changes in the money supply and interest rates and is controlled by the Bank of Canada. Both are intended to achieve macroeconomic policy objectives.
When the economy is experiencing a recession automatic stabilizers will cause: A. transfer payments and tax revenues to be unaffected. B. transfer payments to increase and tax revenues to increase. C. transfer payments to decrease and tax revenues to decrease. D. transfer payments to increase and tax revenues to decrease.
D. transfer payments to increase and tax revenues to decrease.
What is the formula for Tax Multiplier?
Tax Multiplier = (∆ equilibrium rGDP) / (∆ taxes)
Suppose that rGDP is currently $ 1.18 trillion, potential GDP is $ 1.27, the Government Purchases Multiplier is 3, and the tax multiplier is -2.5. a) Holding other factors constant government purchases will need to be increased by $--- trillion to bring the economy to equilibrium at potential GDP. b) Holding other factors constant, taxes have to be cut by $--- nothing trillion to bring the economy to equilibrium at potential GDP. c) The combination of increasing government spending by $0.0060 trillion and cutting taxes by $--- trillion will bring the economy to equilibrium at potential GDP.
a) government purchases increase by $ 0.03 trillion b) taxes will have to be cut by $0.036 trillion c) The combination of increasing government spending by $0.0060 trillion and cutting taxes by $ 0.0288 trillion will bring the economy to equilibrium at potential GDP. a) The multiplier effect refers to the series of induced increases in consumption spending that results from an initial increase in autonomous expenditures. The government purchases multiplier is the ratio of the change in equilibrium real GDP that results from a change in government purchases to the change in government purchases, and is given by the formula below. b) The tax multiplier is the ratio of the change in equilibrium real GDP that results from a change in taxes to the change in taxes, and is given by the formula below. The tax multiplier is a negative number because changes in taxes and changes in real GDP move in opposite directions: an increase in taxes reduces real GDP and a decrease in taxes raises real GDP. a) GPM = (∆ equilibrium rGDP) / (∆ government purchases) b) Tax Multiplier = (∆ equilibrium rGDP) / (∆ taxes) Real GDP is currently $1.18 trillion, and potential GDP is $1.27 trillion, meaning that real GDP must be increased by $ 1.27 trillion - $ 1.18 trillion = $0.09 trillion to bring the economy to equilibrium at potential GDP. Holding other factors constant, the amount by which government purchases will need to be changed to do so can be calculated as shown below. a) ∆ government purchases = (∆ equilibrium rGDP) / (Government purchases multiplier) = (0.09 trillion)/(3) = $0.03 trillion b) ∆ taxes = (∆ equilibrium rGDP) / (Tax Multiplier) = ($0.09 trillion) / (- 2.5) = - $0.0360 trillion c) Real GDP is currently $1.18 trillion, and potential GDP is $1.27 trillion, meaning that real GDP must be increased by $ 1.27 trillion - $ 1.18 trillion=$0.09 trillion to bring the economy to equilibrium at potential GDP. From part (a), holding other factors constant, government spending needs to be increased by $0.0300 trillion to bring the economy to equilibrium at potential GDP. Therefore, to use a combination of increased government spending and tax cuts bring the economy to equilibrium at potential GDP, government spending must be increased by an amount less than $0.0300 trillion. $0.0060 trillion is one such amount. The amount by which an increase in government spending of $0.0060 trillion increases real GDP can be calculated as shown below. (∆ equilibrium rGDP) / (∆ government purchases) = Government purchases multiplier ∆ equilibrium rGDP = (∆ government purchases)*(Government purchases multiplier) =(3)($0.006 trillion) =$0.0180 trillion Since an increase in government spending of $0.0060 trillion increases real GDP by $0.0180 trillion, tax cuts must increase real GDP by $ 0.09 trillion - $ 0.0180 trillion=$0.0720 trillion to bring the economy to equilibrium at potential GDP. Holding other factors constant, the amount by which taxes will need to be cut to do so can be calculated as shown below. Tax multiplier = (∆ equilibrium rGDP) / (∆ taxes) ∆ taxes = (∆ equilibrium rGDP) / (Tax multiplier) = ($0.0720 trillion) / (-2.5) = -0.0288 trillion Therefore, the combination of increasing government spending by $0.0060 trillion and cutting taxes by $0.0288 trillion will bring the economy to equilibrium at potential GDP.
The higher the tax rate, the - the multiplier effect.
smaller The higher the tax rate, the smaller amount of any increase in income that households have available to spend. A cut in tax rates affects equilibrium real GDP in two ways: 1. A cut in tax rates increases households' disposable income, which increases consumption spending. 2. A cut in tax rates increases the size of the multiplier.
The new bridge to the United States in Southern Ontario and similar construction projects elsewhere in the country would be expected to help the economy in the short run, because A. the use of discretionary fiscal policy would create a multiplied increase in real GDP and employment. B. the use of discretionary fiscal policy would create an one time increase in real GDP but result in a job-less recovery. C. the use of discretionary fiscal policy would create an one time increase in real GDP and employment. D. the use of automatic stabilizers would give rise to multipliers larger than one.
A. the use of discretionary fiscal policy would create a multiplied increase in real GDP and employment. Government construction projects represent an increase in government purchases, which increases aggregate demand, stimulating the economy in the short run.
In their efforts to stimulate the economy during the 2007dash2009 global recession, countries around the world (including Canada, China, and the United States) spent trillions of dollars on new roads and other forms of infrastructure. Why would infrastructure spending be such a popular way for government to stimulate the economy? Infrastructure spending are such a popular way for government to stimulate the economy because A. it stabilizes the economy by causing both a decrease in the price level and an increase in the level of real GDP. B. such kind of contractionary fiscal policy helps to prevent inflation reducing the effects and duration of a recession. C. it results into the series of autonomous increases in consumption spending that shift the AD curve to the right. D. it causes an increase in spending and real GDP over a number of periods due to the multiplier effect.
D. it causes an increase in spending and real GDP over a number of periods due to the multiplier effect. Government can increase government purchases and reduce taxes to increase aggregate demand either to avoid or at least to reduce the effects and duration of a recession. An initial increase in government purchases causes the aggregate demand curve to shift to the right and represents the effect of the initial increase in government purchases. Because this initial increase raises incomes and leads to further increases in consumption spending, the aggregate demand curve will ultimately shift further to the right. So far, increase in government purchases causes an increase in spending and real GDP over a number of periods due to the multiplier effect.
Real GDP is currently $1.65 trillion, and potential GDP is $1.64 trillion. If the federal government would decrease government purchases by $30 billion or increase taxes by $30 billion, the economy could be brought to equilibrium at potential GDP. Do you agree with the statement above? A. No, because real GDP will be $1.62 trillion and will not be equal to potential GDP. B. Yes, because real GDP will decrease by $10 billion more than potential GDP due to the multiplier effect. C. No, because both real GDP and potential GDP will decrease by $30 billion. D. No, because real GDP will change by more than $30 billion and will become less than potential GDP.
D. No, because real GDP will change by more than $30 billion and will become less than potential GDP. Because of the multiplier effect, a decrease in government purchases or a decrease in taxes of less than $10 billion is necessary to decrease equilibrium real GDP by $10 billion. Proposed change in government purchases or taxes of $30 billion will cause a decrease in real GDP of more than $30 billion. The new real GDP will be smaller than the potential GDP.
What is fiscal policy? A. Fiscal policy can be described as changes in interest rates and taxes to achieve macroeconomic policy objectives. B. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives. C. Fiscal policy can be described as changes in interest rates to achieve macroeconomic policy objectives. D. Fiscal policy can be described as changes in government spending and interest rates to achieve macroeconomic policy objectives.
B. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
What is an expansionary fiscal policy? A. Expansionary fiscal policy includes increasing government spending and taxes to increase aggregate demand. B. Expansionary fiscal policy includes decreasing government spending and increasing taxes to increase aggregate demand. C. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand. D. Expansionary fiscal policy includes decreasing government spending and taxes to increase aggregate demand.
C. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand. Expansionary fiscal policy involves increasing government purchases or decreasing taxes. Increasing government purchases increases aggregate demand directly because government purchases are a component of aggregate demand. Decreasing taxes increases disposable income which, in turn, increases consumption by households and firms.