Question 1

An example of automatic fiscal policy is

Accepted Answer

Automatic fiscal policy refers to government spending and tax policies that automatically adjust with the economic cycle without the need for new legislation. Unemployment benefits naturally increase as more people become unemployed during economic slowdowns, making it an automatic stabilizer.

Question 2

The supply-side effects show that a tax cut on labor income_{--------------------} employment and_{--------------------} potential GDP.

Accepted Answer

A tax cut on labor income increases the incentive for people to work, which can lead to an increase in employment and, consequently, an increase in potential GDP.

Question 3

If an economy is at the short-run equilibrium illustrated by the figure above, a discretionary fiscal
Policy to adjust the economy to full employment is to

Accepted Answer

The answer of 
If an economy is at the short-run...

Question 4

Need-based spending _{--------------------} during an expansion and_{--------------------} during a recession, which leads to larger budget deficits during the_{--------------------} phase of the business cycle.

Accepted Answer

During an expansion, need-based spending decreases as fewer people require assistance. During a recession, it increases due to higher unemployment and economic hardship, leading to larger budget deficits during the recession phase.

Question 5

Taxes that change with the level of real GDP and income are called

Accepted Answer

Induced taxes are those that vary with the level of real GDP and income, as they are typically based on income or consumption levels.

Question 6

A $100 million decrease in government expenditure on goods and services leads to an even larger
Decrease in aggregate demand because of

Accepted Answer

A decrease in government expenditure reduces income, leading to lower consumption spending due to the marginal propensity to consume, which further decreases aggregate demand.

Question 7

If a tax cut increases people's labor supply, then the tax cut

Accepted Answer

A tax cut increases people's labor supply, which can lead to an increase in potential GDP as more labor can contribute to higher production capacity in the economy.

Question 8

When an economy faces an inflationary gap, an appropriate fiscal policy is to

Accepted Answer

Decreasing government expenditure is a contractionary fiscal policy that can help reduce an inflationary gap by lowering aggregate demand.

Question 9

If we look at the federal government budget over the past 40 years we see that

Accepted Answer

Over the past 40 years, the U.S. federal government has frequently run budget deficits, meaning expenditures have often exceeded revenues.

Question 10

If the nominal interest rate is 10 percent, the inflation rate is 6 percent, and the tax rate on interest income is 25 percent, what is the after-tax real interest rate?

Accepted Answer

The answer of If the nominal interest rate is 10...

Question 11

Ignoring any supply-side effects, if government expenditure on goods and services increase by $10 billion and taxes increase by $10 billion, then real GDP _{--------------------}and the price level_{--------------------} .

Accepted Answer

An increase in government expenditure directly increases aggregate demand, leading to a rise in real GDP and the price level. The tax increase offsets some of this effect, but typically not completely, due to the multiplier effect of government spending.

Question 12

The crowding out effect refers to the_{--------------------}from_{--------------------}in the government's budget deficit.

Accepted Answer

The crowding out effect occurs when increased government spending leads to higher interest rates, which reduces private investment.

Question 13

Suppose the economy is in an equilibrium in which real GDP is less than potential GDP. To increase real GDP, the government can use a fiscal stimulus of

Accepted Answer

Decreasing taxes and/or increasing government expenditure are fiscal stimulus measures that can increase aggregate demand, thereby increasing real GDP towards potential GDP.

Quiz 16: Fiscal Policy

An example of automatic fiscal policy is

The supply-side effects show that a tax cut on labor income-------------------- employment and-------------------- potential GDP.

If an economy is at the short-run equilibrium illustrated by the figure above, a discretionary fiscal Policy to adjust the economy to full employment is to

Need-based spending -------------------- during an expansion and-------------------- during a recession, which leads to larger budget deficits during the-------------------- phase of the business cycle.