Macro Chapter 12

The expansionary effects of an increase in government expenditures will tend to be offset, at least partially, if

government borrowing drives interest rates upward.

Both Keynesians and non-Keynesians now recognize

the difficulties involved in timing discretionary changes in fiscal policy in a stabilizing manner.

Which of the following most accurately indicates the political incentive to spend and/or tax?

Politicians are rewarded for providing programs that benefit their constituents and punished for raising taxes.

Which of the following about fiscal policy is true?

Proper timing of changes in discretionary fiscal policy is both crucially important and difficult to achieve.

Which of the following is a consensus view among economists with regard to fiscal policy?

Since changes in discretionary policy are difficult to time correctly, fiscal policy should not be altered in response to each minor disturbance.

Which of the following provides the clearest statement of the Ricardian equivalence theorem?

The finance of government spending with additional debt is essentially the same thing as finance with higher taxes because the larger debt implies higher taxes in the future.

Which is more likely to stimulate aggregate demand in a timely manner?

a tax cut, because disbursement can take place quickly while spending increases are generally spread out over several years

The crowding-out effect stresses that

additional government borrowing to finance a larger deficit will increase the demand for loanable funds, causing real interest rates to rise.

Higher standards of living are the result of

an increase in the availability of goods and services that people value.

According to new classical economists, the most appropriate policy during a recession would be for the government to

do nothing.

The political incentive structure tends to

encourage budget deficits during both recessions and expansions.

According to the new classical view, budget deficits will

fail to stimulate aggregate demand because people will save more in order to pay the higher future taxes implied by the expansion in government debt.

According to the crowding-out effect, expansionary fiscal policy will lead to

higher interest rates, an appreciated dollar, and reduced net exports.

New classical economists believe that an increase in deficit financing by the government will

increase savings

Both the crowding-out effect and new classical model indicate that

there are side effects of budget deficits that will substantially, if not entirely, offset their expansionary impact on aggregate demand.