Question

7. Those who advocate counter-cyclical fiscal policy would agree with all but one of the following statements. Which is the exception? A) Governments should be non-interventionist. B) Automatic stabilizers are not particularly effective. C) The economy is not capable of automatic self-adjustment in response the problems of unemployment and inflation. D) Counter cyclical fiscal policy is a powerful and effective tool. E) Government budget deficits are a less serious problem than income gaps. 8. Assume that the economy is in a recession and has a balanced budget. If the government increases its spending to reduce unemployment, what will happen to GDP and the government's budget? A) GDP will rise and the budget will be in a deficit. B) GDP will fall and the budget will be in a deficit. C) GDP will rise and the budget will be in a surplus. D) GDP will fall and the budget will be in a surplus. 9. What is the effect of counter-cyclical fiscal policy used to eliminate a recessionary gap? A) An increase in net exports. D) A decrease in the price level. B) A decrease in the exchange rate. E) A decrease in net exports. C) A decrease in interest rates. 10. Which of the following is a result of the crowding out effect? A) It increases exports. C) It reduces the demand for money B) It reduces the interest rate. D) It reduces the size of the multiplier. 11. What is the effect of a decrease in both government spending and taxes by the same amount? A) GDP will fall but unemployment will rise. B) GDP will rise and unemployment will fall. Both GDP and unemployment will fall. D) Both GDP and unemployment will rise. E) There will be no effect on GDP or unemployment. C)

Answer 1

(7) (A)

Since fiscal policy is a result of government intervention, those supporting a fiscal policy will not support non-intervention.

(8) (A)

To bring economy out of recession, government uses expansionary fiscal policy by increasing spending or decreasing tax. This increases aggregate demand, increasing GDP, but causing a budget deficit.

(9) (B)

Countercyclical fiscal policy will increase aggregate demand, increasing income and price level. Higher income will increase import demand, which will increase the demand for foreign currency and increase the supply of domestic currency, thus depreciating domestic currency and decreasing exchange rate.

(10) (D)

When government spending rises, interest rate rises which lowers investment, dampening the initial increase in aggregate demand and lowering multiplier.

(11) (B)

Since spending multiplier is higher than tax multiplier, an equal increase in G and T will increase aggregate demand, thus increasing GDP and decreasing unemployment rate.