Quiz Essay Questions Economics

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CHAPTER 12

Fiscal Policy
A. Short-Answer, Essays, and Problems
1. Give a brief definition of fiscal policy? What are its economic goals? 2. What is the Council of Economic Advisers? 3. “The Employment Act of 1946 is no more than a vague and ill-defined commitment by the Federal government to assist in the achievement of full employment.” Do you agree? Explain. 4. Explain the effect of a discretionary cut in taxes of $40 billion on the economy when the economy’s marginal propensity to consume is .75. By how much is output likely to expand if the economy is operating in the horizontal range of its aggregate supply curve and there are no complications to this fiscal policy? How does this discretionary fiscal policy differ from a discretionary increase in government spending of $40 billion? 5. Explain the effect of a discretionary increase in government spending of $50 billion on the economy when the economy’s marginal propensity to consume is .75. By how much is output likely to expand if the economy is operating in the horizontal range of its aggregate supply curve and there are no complications to this fiscal policy? 6. Explain the aspects of expansionary and contractionary fiscal policy. During which phases of the business cycle would each be appropriate? 7. Differentiate between discretionary fiscal policy and nondiscretionary or built-in stabilization policy. 8. Describe two ways the Federal government can finance a deficit and explain which would have the more expansionary effect. 9. Describe two ways the Federal government could retire debt in the event of a budget surplus and explain which would have the most contractionary impact. 10. What is the anti-inflationary or contractionary effect of a budget surplus? 11. Explain how a small budget surplus could actually be somewhat expansionary rather than contractionary.

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Chapter 12 New 12. Comment on the statement: “Increasing government spending is preferred to a cut in taxes when the U.S. government seeks to fight a recession.” 13. Explain what is meant by a built-in stabilizer and give two examples. 14. “The more progressive a tax system, the greater is the economy’s built-in stability.” Explain this statement for both recessionary and peak phases of the business cycle. 15. Explain how the below graph illustrates the built-in stability of a progressive tax structure.

16. In Year 1, the full-employment budget showed a deficit of about $100 billion and the actual budget showed a deficit of $150 billion one year. In Year 2, the full employment budget showed a deficit of about $125 billion and the actual budget showed a deficit of $150 billion. Based on these data, what can be concluded about the direction of fiscal policy? 17. What is the difference between the actual deficit, the full-employment deficit, and the cyclical deficit? 18. What does the “full-employment budget” measure and of what significance is this concept? 19. Complete the table below by stating whether the direction of discretionary fiscal policy was contractionary (C), expansionary (E), or neither (N), given the hypothetical budget data for an economy.

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Fiscal Policy (2) (3) Actual budget deficit (–) or Full-employment budget Yearsurplus (+)deficit (–) or surplus (+) fiscal policy 1 2 3 4 5 6 – 3.9% – 4.5 – 4.7 – 3.9 – 2.9 – 2.2 – 2.1% – 2.6 – 3.0 – 2.6 – 2.0 – 1.9 (1) (4) Direction of

_____ _____ _____ _____ _____

20. In what fundamental way do the spending-taxation decisions of government differ from the consumption-saving plans of households? Why is this difference significant? New 21. Comment on the statement: “Discretionary fiscal policy offers an ideal approach to dealing with the nation’s economic problems. It is without problems, criticisms, or complications.” New 22. Explain the six problems, criticisms, or complications that arise in the implementation of fiscal policy. New 23. Explain the problems giving rise to this statement: “You would think the government...
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