Reading 27: Fiscal Policy - LOS e ～ Q1-5

答案和详解如下：

1.Unemployment compensation is an example of:

A)   a discretionary fiscal policy stabilizer.

B)   an automatic fiscal policy stabilizer.

C)   an automatic monetary policy stabilizer.

D)   a discretionary monetary policy stabilizer.

The correct answer was B)

Unemployment compensation automatically rises and falls with the business cycle, therefore it is an example of an automatic fiscal policy stabilizer.

2.Which of the following is least likely to be cited as a limitation of discretionary fiscal policy stabilizers?

A)   Changes in the business cycle are difficult to predict.

B)   Taxes paid by households increase as incomes rise.

C)   Legal changes are delayed while legislators debate fiscal policy issues.

D)   It takes time for corporations and individuals to react to fiscal policy changes.

The correct answer was B)

Discretionary fiscal policy stabilizers face several limitations. First, economic forecasts might be wrong, which will likely lead to wrong fiscal policy decisions. Second, complications arise in practice that delay the effects of the discretionary stabilizers. Legal changes take time to implement and to have an effect on the economy. All these choices are examples of limitations of discretionary fiscal policy. On the other hand, “induced taxes”, in which taxes paid by households increase as incomes rise, are an example of an automatic fiscal policy stabilizer, not a discretionary fiscal policy stabilizer.

3.Which of the following is most likely to be described as an automatic fiscal policy stabilizer?

A)   Increase in government spending on defense.

B)   Cuts in government spending on interstate highways.

C)   A fixed income tax rate.

D)   Cuts in the Federal Funds target rate.

The correct answer was C)

Automatic fiscal stabilizers refer to changes in government spending or taxing that occurs automatically as the business cycle changes. One example of an automatic fiscal policy stabilizer is an “induced tax”. Induced taxes refer to the amount of taxes collected as a percentage (i.e., income tax rate) of income. Incomes are positively related to GDP, implying that incomes rise during an economic boom. As incomes rise, the total amount of taxes collected by the government automatically increases. The increase in taxes paid by corporations and individuals tend to slow the economy. Increases in spending on defense or highways are examples of discretionary fiscal policy (requiring government Administration approval). The Federal Funds target rate is set by the Federal Reserve and is not an example of fiscal policy.

4.Which of the following statements best explains how automatic stabilizers work? Even without a change in fiscal policy, automatic stabilizers tend to promote:

A)   a budget surplus during a recession and a budget deficit during an inflationary expansion.

B)   a budget deficit during a recession but do not promote a budget surplus during an inflationary expansion.

C)   a budget surplus during a recession but do not promote a budget deficit during an inflationary expansion.

D)   a budget deficit during a recession and a budget surplus during an inflationary expansion.

The correct answer was D)

Automatic stabilizers such as unemployment compensation, corporate profits tax, and the progressive income tax run a deficit during a business slowdown but run a surplus during an economic expansion. Therefore, they automatically implement countercyclical fiscal policy without the delays associated with policy changes that require legislative action.

5.Which of the following statements best describes automatic stabilizers? Although no legislative action has been taken, automatic stabilizers are programs that apply:

A)   restraint during a recession and stimulus during an economic boom.

B)   restraint during a recession but do not apply stimulus during an economic boom.

C)   stimulus during a recession but do not apply restraint during an economic boom.

D)   stimulus during a recession and restraint during an economic boom.

The correct answer was D)

Automatic stabilizers tend to increase deficits during recessions, which stimulates demand during the contraction phase of the business cycle, and increase surpluses or reduce deficits during economic expansions, to reduce aggregate demand during expansions.