Question 1

During recessions, taxes tend to
A)rise and thereby increase aggregate demand.
B)rise and thereby decrease aggregate demand.
C)fall and thereby increase aggregate demand.
D)fall and thereby decrease aggregate demand.

Accepted Answer

The answer of During recessions, taxes tend to
A)rise and thereby...

Question 2

An example of an automatic stabilizer is
A)unemployment benefits.
B)a lowering of interest rates by the Fed.
C)a decrease in money demand.
D)a decrease in tax rates in response to a recession.

Accepted Answer

Unemployment benefits are an example of automatic stabilizers because they automatically increase during recessions as more people lose their jobs, which helps to stabilize the economy by providing a safety net for those who are unemployed.

Question 3

Other things the same, during recessions taxes tend to
A)rise. The rise in taxes stimulates aggregate demand.
B)rise. The rise in taxes contracts aggregate demand.
C)fall. The fall in taxes stimulates aggregate demand.
D)fall. The fall in taxes contracts aggregate demand.

Accepted Answer

The answer of Other things the same, during recessions taxes...

Question 4

Which of the following is not an automatic stabilizer?
A)the minimum wage
B)the unemployment compensation system
C)the federal income tax
D)the welfare system

Accepted Answer

An automatic stabilizer is a government program or policy that helps stabilize the economy during periods of economic instability. It does so without any additional actions taken by Congress or the President. Option A, the minimum wage, is not an automatic stabilizer because changes to the minimum wage require action by Congress or the President. The other options (B, C, and D) are all automatic stabilizers because they function without any additional action, helping to stabilize the economy during periods of recession or expansion.

Question 5

During recessions, automatic stabilizers tend to make the government's budget
A)move toward deficit.
B)move toward surplus.
C)move toward balance.
D)not necessarily move the budget in any particular direction.

Accepted Answer

Automatic stabilizers, such as unemployment benefits and progressive income taxes, are designed to increase government spending and decrease tax revenue during economic downturns. This leads to a budget deficit as government spending exceeds its revenue.

Question 6

If it were not for the automatic stabilizers in the U.S. economy,
A)the Federal Reserve would have less reason than it has now to monitor stock prices.
B)it would be more desirable than it is now for the Federal Reserve to target an interest rate.
C)a strict balanced-budget rule would be more desirable than it is now.
D)output and employment would probably be more volatile than they are now.

Accepted Answer

Without the automatic stabilizers in the U.S. economy, the output and employment would be more susceptible to fluctuations and could become more volatile. Automatic stabilizers are features of government spending and taxation policies that help regulate economic fluctuations without direct intervention. They include programs such as unemployment insurance, welfare, and progressive taxation, which automatically increase during economic downturns and decrease during economic upswings. These programs help to stabilize the economy and reduce the severity of business cycles. Without them, the economy would be more vulnerable to significant swings in output and employment.

Question 7

A 2009 article in The Economist noted that
A)recent research has allowed economists to estimate the values of fiscal multipliers with a great deal of precision.
B)research on multipliers indicates that multipliers for permanent tax cuts tend to be smaller than multipliers for temporary tax cuts.
C)most of the evidence on multipliers for government spending is based on changes in military expenditures.
D)All of the above are correct.

Accepted Answer

The article in The Economist noted that most of the evidence on multipliers for government spending is based on changes in military expenditures. The article did not discuss the precision of estimating fiscal multipliers or the difference between multipliers for temporary and permanent tax cuts.

Question 8

Suppose foreigners find U.S. goods and services more desirable for some reason other than a change in the exchange rate. Which policies could be used to offset the resulting change in output?
A)an increase in the money supply and an increase in government purchases.
B)an increase in the money supply and a decrease in government purchases.
C)a decrease in the money supply and an increase in government purchases.
D)a decrease in the money supply and a decrease in government purchases.

Accepted Answer

If foreigners find U.S. goods and services more desirable, it leads to an increase in demand for U.S. exports, and consequently, an increase in output. To offset this increase, policies that reduce aggregate demand may be used.

Option A, an increase in the money supply and an increase in government purchases, would increase aggregate demand, which is counterproductive to the goal of offsetting the increase in output.

Option B, an increase in the money supply and a decrease in government purchases, may not reduce aggregate demand enough since the increase in the money supply would offset the decrease in government purchases.

Option C, a decrease in the money supply and an increase in government purchases, would reduce aggregate demand but would be contractionary and may harm the economy in other ways.

Option D, a decrease in the money supply and a decrease in government purchases, would reduce aggregate demand sufficiently while also avoiding the negative effects of an increase in the money supply or a decrease in government purchases. Therefore, this is the best choice.

Question 9

The primary argument against active monetary and fiscal policy is that
A)attempts to stabilize the economy do not constitute a proper role for government in a democratic society.
B)these policies affect the economy with a long lag.
C)these policies affect the economy too quickly and with too much impact.
D)history demonstrates that interest rates respond unpredictably to active policies, leading to unpredictable effects on income.

Accepted Answer

The primary argument against active monetary and fiscal policy is that these policies affect the economy with a long lag. In other words, it takes time for the effects of these policies to be felt in the economy, making it difficult to predict their impact and adjust policy accordingly.

Question 10

Suppose investment spending falls. To offset the change in output the Federal Reserve could
A)increase the money supply. This increase would also move the price level closer to its value before the decline in investment spending.
B)increase the money supply. However, this increase would move the price level farther from its value before the decline in investment spending.
C)decrease the money supply. This decrease would also move the price level closer to its value before the decline in investment spending.
D)decrease the money supply. However, this increase would move the price level farther from its value before the decline in investment spending.

Accepted Answer

When investment spending falls, aggregate demand decreases, leading to a contraction in output. To offset this decrease, the Federal Reserve can increase the money supply through open market operations, which will lower interest rates and stimulate consumption and investment spending. This increase in the money supply will also move the price level closer to its value before the decline in investment spending.

Question 11

During periods of expansion, automatic stabilizers cause government expenditures
A)and taxes to fall.
B)and taxes to rise.
C)to rise and taxes to fall.
D)to fall and taxes to rise.

Accepted Answer

The answer of During periods of expansion, automatic stabilizers cause...

Question 12

Other things the same, automatic stabilizers tend to
A)raise expenditures during expansions and recessions.
B)lower expenditures during expansions and recessions.
C)raise expenditures during recessions and lower expenditures during expansions.
D)raise expenditures during expansions and lower expenditures during recessions.

Accepted Answer

Automatic stabilizers are government programs that automatically adjust transfers (such as unemployment benefits and food stamps) and taxes in response to changes in economic conditions. During a recession, automatic stabilizers increase government expenditures (through increased transfers) and decrease tax revenues, which helps to stimulate aggregate demand and stabilize the economy. During an expansion, automatic stabilizers decrease government expenditures (as the number of people receiving transfers decreases) and increase tax revenues, which serves to prevent the economy from overheating and causing inflation. Therefore, choice C, which states that automatic stabilizers raise expenditures during recessions and lower expenditures during expansions, is the correct choice.

Question 13

Which of the following reduces the interest rate?
A)an increase in government expenditures and an increase in the money supply
B)an increase in government expenditures and a decrease in the money supply
C)a decrease in government expenditures and an increase in the money supply
D)a decrease in government expenditures and a decrease in the money supply

Accepted Answer

According to the monetary policy, an increase in the money supply leads to a decrease in interest rates, while a decrease in the money supply leads to an increase in interest rates. When the government reduces its expenditures, it reduces the demand for funds, which then reduces interest rates. Therefore, a decrease in government expenditures and an increase in the money supply would reduce the interest rate.

Question 14

Automatic stabilizers
A)increase the problems that lags cause in using fiscal policy as a stabilization tool.
B)are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
C)are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession.
D)All of the above are correct.

Accepted Answer

Automatic stabilizers are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession. They operate automatically with changes in economic conditions, providing stability to the economy without the need for policy makers to act. They do not increase the problems that lags cause in using fiscal policy as a stabilization tool, nor do policy makers quickly agree to them in a recession.

Question 15

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could
A)increase the money supply. This increase would also move the price level closer to its value before the rise in stock prices.
B)increase the money supply. However, this increase would move the price level farther from its value before the rise in stock prices.
C)decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices.
D)decrease the money supply. However, this decrease would move the price level farther from its value before the rise in stock prices.

Accepted Answer

According to the equation of exchange, MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the level of output. Therefore, if stock prices rise without any change in output, then the velocity of money and the money supply remain constant. To maintain equilibrium, the price level must decrease, meaning that the Fed should decrease the money supply to move the price level closer to its value before the rise in stock prices. Option C is the only one that follows this logic.

Question 16

The most important automatic stabilizer is
A)open-market operations.
B)the tax system.
C)unemployment compensation.
D)welfare benefits.

Accepted Answer

The tax system is the most important automatic stabilizer because it adjusts tax revenues automatically in response to changes in the economy. During a recession, as incomes and profits decline, tax revenues automatically decrease, which helps to offset the decline in aggregate demand. In contrast, during an expansion, as incomes and profits increase, tax revenues automatically increase, which helps to cool off the economy and prevent inflation. Unemployment compensation and welfare benefits also act as automatic stabilizers, but they are not as important as the tax system because they are relatively small and targeted to a specific group of people. Open-market operations, on the other hand, are not automatic stabilizers because they require deliberate action by the central bank.

Question 17

It is likely that a constitutional amendment that required the government always to run a balanced budget would
A)contribute to a more stable level of output.
B)mitigate the crowding-out effect.
C)eliminate the economy's automatic stabilizers.
D)All of the above are correct.

Accepted Answer

A constitutional amendment requiring a balanced budget would eliminate the government's ability to use automatic stabilizers (such as unemployment benefits or tax cuts) during economic downturns, potentially worsening the effects of a recession. It could also lead to a reduction in government spending, which could crowd out private investment and slow economic growth. While a balanced budget may contribute to a more stable level of output in theory, the loss of automatic stabilizers and potential crowding-out effects make option C the best choice.

Question 18

A fiscal stimulus was initiated by President Obama in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be
A)3.2 for government purchases and 2.0 for tax cuts.
B)2.4 for government purchases and 1.4 for tax cuts.
C)1.6 for government purchases and 1.0 for tax cuts.
D)1.6 for government purchases and 0.4 for tax cuts.

Accepted Answer

The answer of A fiscal stimulus was initiated by President...

Question 19

According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is
A)operating at full capacity.
B)in recession.
C)experiencing zero inflation.
D)experiencing high rates of inflation.

Accepted Answer

When the economy is operating at full capacity, there is no spare capacity for firms to expand their output, so any increase in demand from government spending would be met with equal reductions in demand from the private sector. This means that the crowding-out effect and the multiplier effect would cancel each other out, resulting in no overall impact on the economy.

Question 20

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are
A)smaller in closed economies than in open economies.
B)larger in closed economies than in open economies.
C)smaller in capitalist economies than in socialist economies.
D)larger in capitalist economies than in socialist economies.

Accepted Answer

The answer of A 2009 article in The Economist noted...

Quiz 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

During recessions, taxes tend to

An example of an automatic stabilizer is

Other things the same, during recessions taxes tend to

Which of the following is not an automatic stabilizer?

During recessions, automatic stabilizers tend to make the government's budget

If it were not for the automatic stabilizers in the U.S. economy,

A 2009 article in The Economist noted that

Suppose foreigners find U.S. goods and services more desirable for some reason other than a change in the exchange rate. Which policies could be used to offset the resulting change in output?

The primary argument against active monetary and fiscal policy is that

Suppose investment spending falls. To offset the change in output the Federal Reserve could

During periods of expansion, automatic stabilizers cause government expenditures

Other things the same, automatic stabilizers tend to

Which of the following reduces the interest rate?

Automatic stabilizers

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

The most important automatic stabilizer is

It is likely that a constitutional amendment that required the government always to run a balanced budget would

A fiscal stimulus was initiated by President Obama in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be

According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are