When the economy is in a recession, taxes decrease while spending increases and, as a result of this automatic fiscal policy, aggregate demand O induced; discretionary; is not changed O induced; needs-tested; increases O discretionary; induced; is not changed O discretionary; needs-tested; increases O needs-tested; induced; decreases
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- M1Which statement is CORRECT? A) Automatic stabilizers indicate deliberate action by policy makers. O B) Discretionary fiscal policy shows automatic adjustments without any specific effort by policy makers. C) Discretionary fiscal policy indicates deliberate action by policy makers. Automatic stabilizers are risky tó use and sometimes can get the economy D) destabilized.Figure 41 Type Current Rate Frictional 2.1 Structural 2.2 Cyclical 2.5 Using Okun's Law and the data in figure 41, if potential output is $550 billion and the marginal propensity to consume for this economy is equal to 80-percent, a proper fiscal policy response would be to: Oa. Increase taxes by $5.5 billion. O b. decrease government expenditures by $5.5 billion. Oc increase government expenditures by $11 billion. O d. decrease taxes by $11 billion.
- All of the following are classical objections to the use of expansionary fiscal policy during a recession, EXCEPT O Casical economists emphasize the importance of supply shocks in explaining the business cycle. Expansionary fiscal policy during recessions caused by supply shocks cannot stop a recession and only cause additional inflation O Cassical economists are more lkely to believe that the fiscal multiplier is greater than one, implying that expansionary fscal policy has a poor rate of return in terms of generating short-run real GDP growth. O The economy is quick to adjust during recessions, making expansionary fiscal policy unnecessary and possibly destabilizing. O Expansionary fiscal policy increases government debt, causes inflation, crowds out private investment, and wil likely require taxes to increase at some point.As the economy contracts, transfer payments O fall and tax revenues rise, causing the economy to contract by less than it would in the absence of automatic stabilizers. O fall and tax revenues fall, causing the economy to contract by more than it would in the absence of automatic stabilizers. O rise and tax revenues fall, causing the economy to contract by less than it would in the absence of automatic stabilizers. O rise and discretionary spending fall, causing the economy to contract by less than it would in the absence of automatic stabilizers. Question 11 Which of the following is considered discretionary government spending? O payments to Center for Discase Control (CDC) personnel O infrastructure maintenance spending all responses are correct. funding for the Environmental Protection Agency6. The discretionary fiscal policy initiatives adopted in 2009 were intended mainly to ECOM A. increase aggregate supply. B. increase aggregate demand. C. decrease aggregate supply. balat 800S nhub.aDet D. decrease aggregate demand
- Asap both 1.a) Which of the following statements is correct?l.Expansionary fiscal policy is used to remove a recessionary gap.ll. Expansionary fiscal policy is used to shift AD right.A) l onlyB) I onlyC)both I and ID) neither I nor ll 1.b) Which of the following are examples of contractionary fiscal policy?A) decreasing government expendituresB) increasing taxesC) increasing transfer paymentsD) A and B are both contractionary fiscal policiesE) A, B, and C are all contractionary fiscal policiesAn expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment and, as a result, the future growth rate of O a. Is crowded out, potential output is reduced. O b. Rises to an unsustainable level; real GDP is reduced. O c. Increases, net exports increases. O d. Is crowded out; corporate tax revenue is reduced. e Increases, aggregate demand increases.The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession. Price Level 160 140 LA 120 100 80 60 40 20 0 Fiscal Policy LRAS AD₁ Real GDP (billions of dollars) billion AS 80 160 240 320 400 480 560 640 720 800 AD O Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? billion B b. If the MPC is 0.6, how much does government purchases need to change to shift aggregate demand by the amount you found in part a? Suppose instead that the MPC is 0.75. c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and government purchases need to change by $ billion.
- FISCAL POLICY, DEF spending has shifted AD left and now we are at AD • Assume that the economy's full-employment is Q- and we want the government to restore full-employment with stable Py using fiscal tools. It has 3 main options: 1. Increase government spending 2. Reduce taxes 3. Use a combination of the twe Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. 1) By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve this same increase in aggregate demand? Why the difference? 1 Money Multiplier (K) = 1-MPC Total Change in Spending = multiplier × new spending injectionGiven an upward-sloping short-run AS curve, expansionary fiscal policy (ceteris paribus) will result in: (i) Higher prices in the short run (ii) Higher output in the short run (iii) Higher prices in the long run (iv) Higher output in the long run O a. Only (i) and (ii) O b. Only (iii) and (iv) O c. Only (ii) and (iii) O d. Only (i) and (iv)5. Show why a $10 billion reduction in government purchases of goods and services will have a larger effect on real GDP than a $10 billion reduction in government transfers by completing the accom- panying table for an economy with a marginal propensity to consume (MPC) of 0.6. The first and second rows of the table are filled in for you: on the left side of the table, in the first row, the $10 billion reduction in government purchases decreases real GDP and disposable income, YD, by $10 billion, lead- ing to a reduction in consumer spending of $6 billion Rounds 1 2 3 4 5 6 7 8 9 10 Decrease in G=-$10 billion (billions of dollars) Change in real GDP Change in G or C AG = -$10.00 AC = AC = AC = AC = AC = AC = AC = AC = AC = -6.00 ? ? ? ? ? ? ? ? -$10.00 -6.00 ? ? ? ? ? ? ? ? Change in YD -$10.00 -6.00 ? ? ? ? ? ? ? ? Change in TR or C ATR=-$10.00 AC = AC = AC = AC = AC = AC = AC = AC = AC = (MPC x change in disposable income) in row 2. How- ever, on the right side of the table, the $10…
