Fiscal Policy, Recognition Lag, Government Spending, Principles of Macroeconomics Quiz
The key words in this Macroeconomics course include Fiscal Policy, Economy, Recognition Lag, Government Spending, Tax Rates, Contractionary Fiscal Policy, Stimulus Package, Expansionary Fiscal Policy, Supply Curve
When fiscal policy is used to manage the economy, there are a number of factors that can delay its impact.
Which of the following is an example of a recognition lag?
After an elected official proposes to spend more money to stimulate economic growth, it takes time for other elected officials to agree and take action.
After the policy takes effect, it takes time for its complete effects to ripple through the economy.
After a law is passed that authorizes government spending, the bureaucracy within the government needs time to set up needed processes and procedures, and to identify areas that have the greatest need for federal spending.
Although economic conditions seem bad enough to warrant government action, it takes time for economists to confirm that conditions are bad enough.
Explanation : A recognition lag occurs over the time period it takes to recognize and verify the existence of a situation that may require government action. A recognition lag occurs when economists take time to determine if conditions are bad enough.
When the economy is in a recession, expansionary fiscal policy can be used to stimulate and encourage economic growth. Which of the following scenarios represent expansionary fiscal policies from both a supply and demand perspective at the same time?
The government raises tax rates and reduces unemployment insurance payments.
The Federal Reserve decreases the money supply and raises the interest rate while the government simultaneously reduces future taxes.
The government lowers tax rates.
The government lowers tax rates and issues a partial refund of taxes that have already been paid.
Explanation : From a supply-side perspective, the government can lower tax rates. This gives people the incentive to work harder and earn more income. In the process, more output is produced, thus shifting the short- and long-run aggregate supply curves. From a demand-side perspective, either partially refunding previously paid taxes or undertaking an infrastructure project (increasing government spending) should increase aggregate demand. Both represent an expansionary fiscal policy.
Which of the following proposals is not likely to shift the aggregate supply curve?
a change in the supplier of school lunches at public schools
a 5% reduction in tax rates for those in the top 0.000001% of the income distribution
Pell Grants, which are government subsidies for college education
An increase in social security payments
Explanation : Pell grants are supply-side subsidies with the intent to increase human capital, which will increase future innovation and production. In general, demand-side fiscal policy focuses on incentives to increase spending, while supply-side fiscal policy focuses on incentives to increase production.
Which of the following statements is true?
Contractionary fiscal policy is used to stimulate an economy, and eliminate contractions
Contractionary fiscal policy will lead to runaway inflation
Contractionary fiscal policy will lead to an increase in government debt
Contractionary fiscal policy can prevent an economy from overheating
Explanation: Contractionary fiscal policy would be implemented when the economy is in an expansion. The government will decrease government spending or increase taxes. If aggregate demand is too high, then the economy is operating past its natural equilibrium, with unemployment lower than the natural rate and output greater than the natural rate. This is unsustainable in the long run and causes pressures on prices to increase. Contractionary fiscal policy is used to keep prices under control.
Which of the following statements is true?
The Obama stimulus package of 2009 had significantly more funding than the Bush 2008 package
the Obama stimulus of 2009 had the same amount of funding as the Bush package
The Obama stimulus package of 2009 only favored rich people
The Obama stimulus package of 2009 had significantly less funding than the Bush 2008 package
Explanation: The government enacted two significant fiscal policy initiatives. The first, signed in February 2008 by President George W. Bush, was the Economic Stimulus Act of 2008. The cornerstone of this act was a tax rebate for Americans. The overall cost of this action to government was $168 billion. In February 2009, less than one month after taking office, President Obama signed the American Recovery and Reinvestment Act (ARRA) of 2009. The focus of this second act shifted to government spending. Seventy percent of the ARRA cost was due to new government spending; the remaining 30% focused on tax credits. In addition, the size of this second fiscal stimulus— $787 billion—was more than four times larger than the first.