Fiscal Policy Quiz
During which decade was stagflation a major problem?
1970s
What is the current estimate of the natural rate of unemployment?
4 percent
What percent of the time has the federal budget been in deficit since the Great Depression?
85 percent
multiplier effect of fiscal policy
A change in fiscal policy affects aggregate demand by more than the original change in spending or taxing.
example of discretionary fiscal policy
Congress votes to increase the amount of unemployment insurance a person may receive.
beliefs about debt that are most widely accepted
Debt becomes more of a burden on future generations because as foreigners buy more bonds, future debt service payments no longer remain in the country. Debt is a burden on future generations because one generation is passing on to the next generation the burden of its borrowing.
A contractionary gap results when the economy is exceeding its potential output.
False
Automatic stabilizers completely eliminate economic fluctuations.
False
Discretionary fiscal policy is an effective way to end stagflation in the short run.
False
It is beneficial in the long run when the economy exceeds its potential output
False
Keynes believed that fiscal policy could only be used in times of low unemployment for it to be effective.
False
Keynes believed that the economy would automatically return to its potential output in a relatively short period of time.
False
Lags make it easier to carry out discretionary fiscal policy.
False
The Employment Act of 1946 barred the federal government from promoting full employment and price stability
False
The economy is less stable today than it was before the onset of the Great Depression.
False
The goal of fiscal policy is to achieve an unemployment rate of zero percent.
False
crowding
Government borrowing and spending stimulates private investment in an otherwise dead economy.
What is a drawback of discretionary fiscal policy?
Long, unpredictable lags can cause the policy to do more harm than good.
What is the most likely reason why the federal budget has been in deficit for such a long period of time?
Public officials try to maximize their political support by spending more than they tax.
A budget deficit results when government spending exceeds government revenue.
True
A typical recession will be more than half over before it is officially recognized.
True
Although the economy might exceed its potential output in the short run, it cannot exceed its potential in the long run
True
Automatic stabilizers boost aggregate demand during periods of recession
True
Automatic stabilizers may affect personal incentives to work, spend, save, and invest.
True
Before the 1930s, fiscal policy was seldom used to influence the overall performance of the economy.
True
Federal debt adds up all federal deficits and subtracts federal surpluses
True
Fiscal policy can sometimes affect aggregate supply unintentionally.
True
It is impossible to fight unemployment and inflation at the same time with fiscal policy in the short run.
True
The multiplier effect says that changes in fiscal policy affect aggregate demand by more than the original change in spending or taxing
True
The natural rate of unemployment should be estimated before any discretionary fiscal policies are adopted.
True
There is no cyclical employment at the natural rate of unemployment.
True
Would a classical economist most likely agree with the government should not interfere in the marketplace?
Yes
What does stagflation cause?
an increase in unemployment, a leftward shift of the aggregate supply curve, an increase in inflation
How much time does it usually take for discretionary fiscal policy to become effective?
between 9 and 18 months
How does the federal government finance a budget deficit?
by selling U.S. government securities
When bonds mature, how does the federal government pay off maturing bondholders?
by selling more bonds
What did maintaining an annually balanced budget usually cause?
decreased unemployment during recessions, overheated economy during expansions
What do automatic stabilizers aim to stabilize?
disposable income and aggregate demand
What will most likely result if output exceeds the economy's potential?
higher inflation rate
An expansionary gap would result from which of the following situations?
output exceeds the economy's potential
a result of crowding out
private investment decreases
Which term applies to the delay that results from time needed to identify a macroeconomic problem?
recognition lag
In which of the following order do the four lags usually occur?
recognition lag, decision-making lag, implementation lag, effectiveness lag
What prompted the creation of Keynesian theory?
the Great Depression
What is federal debt?
the total amount owed by the federal government
What will result if the economy achieves its potential output?
there is full employment
examples of an automatic stabilizer
unemployment insurance, federal income tax, progressive income tax
Suppose that during a major war, a country exceeds its potential output. What will most likely happen in the long run after the war is over?
unemployment will increase, the country will once again perform at its potential output, inflation rates will decline
Do automatic stabilizers adjust to the ups and downs of the economy to keep disposable income constant?
yes
Would John Maynard Keynes most likely agree with business expectations can discourage firms from investing?
yes
