Chapter Twelve: Module Quiz -- Fiscal Policy

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  1. Which of the following is not an example of an automatic stabilizer?

      income taxes increase when the economy recovers.
      welfare reform makes it more difficult to receive welfare even when the economy enters a recession.
      unemployment benefits increase when the economy's output falls.
      food stamps increase as more people become unemployed.

  2. Fiscal Policy is often not very timely because of the long lags involved. Suppose the government recognizes the economy is going into recession and begins the process to reduce tax rates. The time it takes government to pass a tax reduction bill is called the

      recognition lag.
      implementation lag.
      impact lag.
      political cycle.
      none of the above.

  3. All of the following are examples of contractionary fiscal policy except

      a reduction in government expenditures
      an increase in the discount rate
      a reduction in transfer payments
      military spending cutbacks

  4. If the economy is experiencing a recessionary gap, the government should do which of the following?

      increase taxes
      decrease transfer payments
      increase government expenditures
      none of the above

  5. Suppose the economy is in a recessionary gap of $5,000 and the output multiplier is 4. By how much should government expenditures change in order to eliminate this gap?


  6. Fiscal policy is used less frequently than monetary policy as a stabilization tool because

      expansionary fiscal policy leads to increased deficits.
      fiscal policy has serious lag problems.
      fiscal policy is heavily involved in the political process, which means that making sound economic decisions is more difficult.
      all of the above

  7. Supply-side economics argues that a cut in taxes will

      lead to a windfall for the rich and increase the deficit.
      lead to a strong incentive for people to work more hours and invest in new capital.
      lead to a more equal distribution of income.
      shift the Aggregate Supply curve to the left.

  8. If tax cuts are implemented, supply-siders argue that deficits may not increase because

      the Laffer curve suggests that taxes may be so high as to seriously discourage production. A reduction in those taxes may lead to an increase in new output and hence more overall revenue
      supply-side economics should be accompanied by reductions in government spending
      economic growth will increase quickly, increasing total government revenues
      all of the above

  9. An inflationary gap occurs when actual GDP exceeds potential GDP. This situation puts pressure on prices to increase.


  10. The 1980s experience with supply-side economics leads us to believe that we were on the left-hand side of the Laffer curve, i.e. a cut in tax rates led to a decrease in tax revenues.


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