Quiz - Ch. 18A: Fiscal Policy

As of April 5, 2020, the federal government has allocated $___________ to its fiscal policy programs?

$2.3 trillion

If the MPC is 0.9, the fiscal policy multiplier equals:

10

If the MPC is 0.5, then the fiscal policy multiplier is

2.0

Which of the following would result in the greatest (largest) fiscal policy impact?

Direct government payments to poor households

Which of the following is NOT a part of the current fiscal policy effort?

Increased quantitative easing

If the economy is hit by a negative real shock that raises inflation and unemployment, which fiscal policy action should the government take in order to keep inflation and unemployment stable?

No government action can achieve those goals.

Which of the following is a criticism of federal government Annually Balanced Budgets?

They are Pro-Cyclical

In what are monetary and fiscal policies similar?

They both target aggregate demand to overcome business fluctuations.

In a recession, automatic stabilizers cause:

a decrease in tax revenues and an increase in government spending.

Fiscal policy lags:

are generally longer than monetary policy lags.

Modern Monetary Theory minimizes the importance of which of the following?

crowding out

Which of the following limits the effectiveness of fiscal policy?

crowding out

On Thursday the 9th the Fed announced it would begin buying junk bonds and the price of gold increased by $42 per ounce. this is an example of __________ monetary policy leading to __________.

expansionary; expected inflation

If the economy is in a recession, the most appropriate fiscal policy would be to:

increase government spending and cut taxes, thus running a higher budget deficit.

Increases in government spending financed through additional borrowing will typically have the largest impact on aggregate demand when:

increase uncertainty has caused a decrease in private sector investing.

Figure: Aggregate Demand Shifts Refer to the figure. Suppose the economy is initially at point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short-run increase in inflation by:

increasing taxes so that the AD curve shifts back to AD1.

As a result of the multiplier effect, a tax cut causes a:

larger shift of the aggregate demand curve to the right.

Fiscal policy is:

less effective in dealing with real shocks than with aggregate demand shocks.

Ricardian Equivalence:

occurs when people see that lower taxes today means higher taxes in the future, so instead of spending their tax cut, they save it to pay future taxes.

An increase in government spending causes:

the aggregate demand curve to shift to the right.

The crowding out effects of fiscal policy are smaller if:

the economy is in a recession caused by low aggregate demand.