Question 1

Explain the difference between a tax cut and a tax rebate.

Accepted Answer

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Question 2

Suppose that in an open economy the government engages in extensive spending financed through bond sales that raise interest rates in the economy. Is it possible for net exports to fall and offset the government's AD stimulus to some extent?
B. If interest rates are high in the economy, there will be a net inflow of funds from other countries. The increased demand for the local currency will cause it to appreciate. This will reduce exports and increase imports, and thus net exports (X-M) will fall and negatively impact AD.

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Question 3

President Bush favored increases in government spending as a way to stimulate the economy, while President Obama favors tax cuts.

Accepted Answer

It is actually the opposite. President Bush favored tax cuts and President Obama favored increases in government spending to stimulate the economy.

Question 4

According to the dynamic AD-AS model, the economy always returns to the Solow growth rate in the long run. Why then should government intervene and do anything when the economy suffers a negative aggregate demand shock and falls into a recession?

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Question 5

The lags associated with the Kennedy administration's tax cuts were extremely long.

Accepted Answer

According to economic analysis, the lags associated with the Kennedy administration's tax cuts were indeed very long, taking several years to have a significant impact on the economy.

Question 6

Why does fiscal policy not work well to combat real shocks? Explain your answer with a dynamic AD-AS diagram.

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Question 7

Explain why, in the long run, an increase in government spending will not work well to combat a negative real shock.

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Question 8

Under what circumstances is fiscal policy most effective as a tool to stimulate the economy, and how should the policy be financed? Identify time periods when circumstances like this existed.

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Question 9

Briefly discuss the different paths that expansionary fiscal policy can follow and 8 the level of crowding out associated with each one.

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Question 10

Lags associated with monetary policy are generally longer than lags associated with fiscal policy.

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Question 11

What, if any, timing challenges exist with the use of discretionary fiscal policy? If there are any, compare and contrast them with the timing challenges of monetary policy.

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Question 12

Suppose an economy suffers a real shock that lowers the Solow growth rate and the SRAS. Will a fiscal policy be effective in taking the economy back to its original point? How would the existence of crowding out affect your answer? Illustrate your answer with the use of a diagram.

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Question 13

Is fiscal policy effective in reducing both inflation and unemployment at the same time?

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Question 14

Discuss the four major limits to fiscal policy.
B. The first difficulty is related to the crowding out effect, in which a decrease in private spending follows an increase in government spending; this results in a net reduction or neutralization of aggregate demand. The second difficulty is related to the size of the economy, which is too large for government spending to have a meaningful impact on real growth or inflation. The third difficulty is related to the various lags in passing and implementing the policy plan. These lags make the timing to offset any aggregate demand shock difficult, so that they can actually make business fluctuations more variable. The above three difficulties arise from using fiscal policy to influence aggregate demand. The fourth difficulty is that fiscal policy is not effective in dealing with an economy experiencing real shocks.

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Question 15

In contrast to previous recessions in the post-World War II period, the U.S. government actively used fiscal policy to fight the most recent (2008) recession. Compared to other post- WWII recessions, what would justify the level of active government policy actions taken in the 2008-2009 recession?

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Question 16

What are the multiplier and crowding out effects? Using a dynamic AD-AS diagram, contrast the implications for fiscal policy multiplier effects in the presence of crowding out.

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Question 17

Discuss any current government policies in the economy that are indicative of active fiscal policy changes.

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Question 18

Explain the multiplier effect.

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Question 19

When countries have extremely high debt levels, expansionary fiscal policy could cause AD to contract.

Accepted Answer

When countries have high debt levels, expansionary fiscal policy might cause an increase in interest rates, which could discourage borrowing and spending, leading to a contraction in aggregate demand. Additionally, high debt levels could limit the government's ability to finance spending increases, potentially leading to a reduction in government spending and further dampening AD.

Quiz 35: Monetary Policy