Economics 【Reading 19】Sample between, 2012, policy

kim226

A distinction between fiscal policy and monetary policy is that fiscal policy:

A) is aimed at promoting economic growth, while monetary policy is aimed at promoting price stability.

B) is typically expansionary, while monetary policy is typically contractionary.

C) concerns taxes and government spending, while monetary policy concerns the money supply.

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The distinction between fiscal and monetary policy is that a country’s government determines fiscal policy through taxes and spending, but its central bank determines monetary policy by controlling the money supply. Both fiscal and monetary policy can be used to promote economic growth and price stability. Either fiscal policy or monetary policy can be expansionary or contractionary.

terpsichorefan

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karoliukas

Which one of the following Federal Reserve monetary policies, when pursued in line with the U.S. government’s fiscal policies, would help increase aggregate demand during a period of high unemployment?

A) A decrease in the discount rate.

B) The sale of bonds by the Fed.

C) An increase in the reserve requirements for financial institutions.

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A decrease in the Fed’s lending rate is a monetary tool that the Fed can use to increase the money supply, thereby increasing aggregate demand during recessionary times when there is high unemployment. An increase in the reserve requirements and the sale of bonds by the Fed would all be restrictive monetary policies that would reduce the amount of money in the economy and reduce aggregate demand.

karoliukas

The government budget deficit of Country M is increasing. At the same time, the government budget surplus of Country N is decreasing. Are the fiscal policies of these countries expansionary or contractionary?

A) Both are contractionary.

B) Both are expansionary.

C) One is expansionary and one is contractionary.

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Expansionary fiscal policy increases a budget deficit or decreases a budget surplus. Contractionary fiscal policy decreases a budget deficit or increases a budget surplus.

karoliukas

Which of the following statements about achieving proper timing in fiscal policy is least accurate?

A) There is usually a time lag between when a change in policy is needed and when the need is recognized by policy makers.

B) Improvements in quantitative methods have made the occurrence of recessions or expansions quite predictable.

C) Policy errors are inevitable due to unpredictable events.

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One problem in achieving proper timing in fiscal policy is the inability to accurately predict a recession or expansion.

karoliukas

The country of Zurkistan is experiencing both high interest rates and high inflation. The government passes laws that reduce government spending and increase taxes. It takes many months before interest rates fall and inflation is reduced. This is an example of:

A) impact lag in discretionary fiscal policy.

B) action lag and automatic stabilizers.

C) recognition lag in discretionary fiscal policy.

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This is an example of discretionary fiscal policy involving impact lag because it takes time for the impact of the change in taxing and spending to be felt throughout the economy.

karoliukas

Which of the following statements best explains the importance of the timing of changes in discretionary fiscal policy? Changes in discretionary fiscal policy must be timed properly if they are going to:

A) exert a stabilizing influence on an economy.

B) help the government achieve a balanced budget.

C) enable the government to control the money supply.

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Proper timing of discretional policy is needed to reduce economic instability. If timed incorrectly, the fiscal policy change could increase rather than reduce economic instability.

karoliukas

The crowding-out model implies that a:

A) budget surplus will retard aggregate demand and trigger an economic downturn.

B) budget deficit will increase the real interest rate and thereby retard private investment.

C) budget deficit will stimulate aggregate demand and trigger a multiplier effect which will lead to inflation.

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Increased budget deficits will increase the demand for loanable funds and lead to higher interest rates and thus lower private investment. Crowding-out implies that an increase in government spending will choke off private investment and reduce the intended impact of fiscal policy changes on aggregate demand.

karoliukas

Robert Necco and Nelson Packard are economists at Economic Research Associates. ERA asks Necco and Packard for their opinions about the effects of fiscal policy on real GDP for an economy currently experiencing a recession. Necco states that real GDP is likely to increase if both government spending and taxes are increased by the same amount. Packard states that if both government spending and taxes are increased by the same amount, there is no expected net effect on real GDP.
Are the statements made by Necco and Packard CORRECT?

Necco

Packard

A) Incorrect Correct

B) Incorrect Incorrect

C) Correct Incorrect

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Necco is correct because the multiplier effect is stronger for government expenditures versus government taxes. All of the increase in government spending enters the economy as increased expenditure, whereas only a portion of the tax increase results in lessened expenditure (determined by the marginal propensity to consume), because part of the tax increase will come from the savings of the taxpayer (determined by the marginal propensity to save). Packard is incorrect; the effect on real GDP of an increase in government spending combined with equal increase in taxes will be positive because the multiplier effect is stronger for government spending versus the tax increase.

karoliukas

Assuming the economy currently is experiencing high inflation, an example of appropriate discretionary fiscal policy is:

A) reduce government expenditures on major government construction projects.

B) reduce the money supply.

C) increase the federal funds target rate.

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Discretionary fiscal policy refers to the federal government’s decisions regarding government spending and taxing. A reduction in government spending on major government construction projects is likely to lead to a reduction in aggregate demand and less pressure on prices, reducing inflation.