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Which of the following best describes discretionary fiscal policy?
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when the government passes a new law that explicitly changes tax or spending levels
when the government passes a new law that implicitly changes tax or spending levels
when the government increases taxes to reduce the money supply
when the government sets automatic stabilizers
when the government passes a new law that explicitly changes tax or spending levels
Fiscal policy is conducted both through discretionary fiscal policy, which occurs when the government enacts taxation or spending changes in response to economic events, or through automatic stabilizers, which are taxing and spending mechanisms that, by their design, shift in response to economic events without any further legislation. Therefore, when the government passes a new law that explicitly changes tax or spending levels, this is best described as discretionary fiscal policy.
If there is an increase in budget deficits by 1% of GDP and the initial interest rate is 5%, the long-term interest rate will be between 5.5% and what?
6%
A consensus estimate based on a number of studies is that an increase in budget deficits (or a fall in budget surplus) by 1% of GDP will cause an increase of 0.5–1.0% in the long-term interest rate. Therefore, if initial interest rate is 5%, the long-term interest rate will be between 5.5% and 6%.
How would economists define implementation lag?
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The time between recessions.
The time it takes to pass bills.
The time it takes to recognize a recession has occurred.
The time it takes to disperse funds and start a project.
The time it takes to disperse funds and start a project.
Economists call the time it takes to disperse funds and start projects to help upturn the economy the implementation lag.
During good economic times, what is difficult for politicians to accept?
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They must propose a permanent policy change.
They should employ fiscal policies.
They should cut taxes.
They should increase taxes.
They should increase taxes.
Politicians tend to prefer expansionary fiscal policy over contractionary policy. There is rarely a shortage of proposals for tax cuts and spending increases, especially during recessions. However, politicians are less willing to hear the message that in good economic times, they should propose tax increases and spending limits.
Economic recessions should automatically lead to _______________.
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larger budget deficits
smaller budget deficits
inflation
larger budget surpluses
larger budget deficits
Most economists view the proposals for a perpetually balanced budget with bemusement. After all, in the short term, economists would expect the budget deficits and surpluses to fluctuate up and down with the economy and the automatic stabilizers. Economic recessions should automatically lead to larger budget deficits or smaller budget surpluses, while economic booms lead to smaller deficits or larger surpluses. A requirement that the budget be balanced each and every year would prevent these automatic stabilizers from working and would worsen the severity of economic fluctuations.
Which of the following is a consequence of crowding out?
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lowered household consumption
increased household consumption
increased business investment
increased exports
lowered household consumption
Crowding out refers to when federal spending and borrowing causes interest rates to rise and business investment to fall. This can lead to a reduction in business investment and household consumption.
Which of the following is true about the standardized employment budget?
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it essentially eliminates the impact of automatic stabilizers
it essentially magnifies the impact of automatic stabilizers
it captures the federal budget for increasing employment
it assumes businesses earn an economic profit equal to 0
it essentially eliminates the impact of automatic stabilizers
Each year, the nonpartisan Congressional Budget Office (CBO) calculates the standardized employment budget—that is, what the budget deficit or surplus would be if the economy were producing at potential GDP, where people who look for work were finding jobs in a reasonable period of time and businesses were making normal profits, with the result that both workers and businesses would be earning more and paying more taxes. In effect, the standardized employment deficit eliminates the impact of the automatic stabilizers.
When the government passes a bill it takes time for the bill to take effect. This is because of?
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recognition lag
implementation lag
legislative lag
the recession has ended
implementation lag
Once the government passes a bill to help improve the economy during a recession it takes some time to disperse the funds to the appropriate agencies to implement the programs. Economists call the time it takes to start the projects the implementation lag.
What is a structural economic change?
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the implementation of new fiscal policy
the prevalence of inflation
the expansion of a new set of industries and moving workers to those industries
the introduction of countercyclical policies
the expansion of a new set of industries and moving workers to those industries
The process of structural economic change is the expansion of a new set of industries and the movement of workers to those industries.
If the budget is balanced each and every year, how would automatic stabilizers behave?
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they would work in excess and cause large economic fluctuations
they would not work and economic fluctuations would worsen
their effects would be cancelled out
the budget would replace the automatic stabilizers, performing the same work
they would not work and economic fluctuations would worsen
A requirement that the budget be balanced each and every year would prevent these automatic stabilizers from working and would worsen the severity of economic fluctuations.
