question

The Laffer Curve

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Initially slopes upward as increasing tax rates lead to increasing tax revenue but eventually will slope downward as increasing tax rate lead to decreasing tax revenue.

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All of the following are are automatic fiscal stabilizers EXCEPT

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A congressionally mandated decrease in tax rates to stimulate the economy.

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Automatic Fiscal Stabilizers

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Decrease in unemployment compensation payments during an expansion, decrease in overall tax revenues during a recession, increase in unemployment expenditures during a recession.

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True about Ricardian Equivalence Theorem

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The theorem states that the public will react to a tax cut by saving more.

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Suppose the economy is experiencing a recessionary gap at the current level of GDP. Which fiscal policy actions would be most appropriate given this recessionary gap?

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Decreasing Taxes

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The Keynesian perspective on the effect of an increase in taxes is that this policy action.

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Generates reductions in consumption and in saving.

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If the Economy is operating on the long-run aggregate supply curve, than the expansionary fiscal policy will.

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Generate an increase in real GDP and higher prices in the short run, but then real GDP will decrease to it's long-run level, and the price level will increase some more.

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According to the Laffer curve, we know with certainty that an increase in the tax rate will.

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Cause tax revenue to increase, decrease, or remain unchanged.

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Keynes believed that the way to prevent recessions and depressions was to.

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Increase aggregate demand through expansionary fiscal policy.

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In Country Z, the government simultaneously increases its expenditures by $25 billion and increases taxes by $25 billion. If the MPS is equal to 2.0, the government's action___real GDP by ___.

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Increases; $25 billion

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In the short run, expansionary fiscal policy usually will.

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Increase the price level and increase real GDP.

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Which of the following are lags that fiscal policy makers must cope with?

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Recognition time lags, Action time lags, Effect time lags

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Suppose there are two economies that are identical in every way with the following exceptions. Economy A has an unemployment compensation system while economy B does NOT have an unemployment compensation system. Now suppose both economies experience the same drop in planned investment. What is the outcome?

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Real GDP will fall more in economy B than economy A.

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The Laffer curve indicates what?

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There is an ideal tax-revenue-maximizing tax rate for government taxes.

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An increase in government spending without an accompanying increase in taxes.

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Requires additional government borrowing.

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According to the Keynesian approach, a decrease in taxes.

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Will increase consumption by an amount of less than the change in taxes.

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Supply-Side economic focuses on tax cuts to stimulate.

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Aggregate supply by increasing production.

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In January 2009, the President submitted a bill to Congress in order to stimulate the economy and increase employment. The legislation was passed in March 2009, and the spending occurred from June 2009 to March 2011. As a result.

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The full effect of the fiscal policy change would not be felt until after March 2011 because of the effect time lag.

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Expansionary fiscal policy is used to.

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Combat recessions.

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Discretionary fiscal policy.

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Is not very effective in influencing real GDP during normal times because of time lags; Can be very effective in influencing the real GDP during abnormal times, such as when a nation is at war; May reassure investors and consumers that the federal government will be able to avert a major economic downturn.

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The crowding out effect of expansionary fiscal policy refers to?

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A reduction in private sector planned investment.

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The changing of government expenditures or taxes to achieve national economic goals is?

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Discretionary fiscal policy.

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The amount of time it takes Congresses to debate the size of a tax cut is known as the?

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Action time lag.

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Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of __, which can be closed by __.

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$2 trillion; expansionary fiscal policy that generates another $2 trillion in total spending.

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In the traditional Keynesian Model, if the government cut taxes, then....

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Both consumption and real Gross Domestic Product (GDP) will increase.

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Whenever government spending is a substitute for private spending.

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The effect of expansionary fiscal policy are dampened.

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The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will.

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Have no effect on aggregate demand.

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Which of the following is a discretionary fiscal policy action?

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A deliberate tax cut when the economy experiences high unemployment.

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The traditional Keynesian approach to fiscal policy assumes.

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The price level is constant

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Automatic stabilizers are so-named because.

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They occur automatically when really GDP changes.

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Supply-Side theory suggests that.

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Lower tax rates may not reduce overall tax revenue.

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Suppose the government increases lump-sum taxes. This causes.

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Disposable income to decrease, which causes consumption spending to decrease aggregate demand to decrease.

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Discretionary fiscal policy is so named because it.

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Involves specific changes in taxes and government spending undertaken by Congress and the president.

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The effect time lag of fiscal policy refers to.

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The time between the onset of a policy and when the policy has impact on the economy.

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In the traditional Keynesian model, an increase in government spending.

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Causes the C+I+G+X line to shift upward by the full amount of the increase in government spending.

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At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve.

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A reduction in tax rates increase tax revenues.

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If the government pays for a new library in your neighborhood that you regularly visit, and you stop to Barnes and Nobles to buy books, this is an example of.

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A direct expenditure offset.

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The various time lags involved with fiscal policy imply that.

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Fiscal policy may often be destabilizing if the effects of the policy kick in after the need is over

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The crowding-out effect refers to.

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A decrease in consumption and investment caused by an increase in government borrowing.

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Discretionary Fiscal policy.

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Is the use of government spending and tax policies to influence economic growth and inflation.

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All of the following are automatic stabilizers EXCEPT

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Discretionary increases in government spending.

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All Automatic stabilizers are.

answer

Income transfer payments; Progressive income tax system; Unemployment compensation.

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