Which of the following is an example of a pro-cyclical policy? Select one: a. Th

Question

Which of the following is an example of a pro-cyclical policy?

Select one:

a. The Fed lowering the Required Reserves Ratio during an expansion

b. The Fed targeting a lower Federal Funds Rate during a recession

c. Congress lowering government spending during an expansion

d. The Treasury bailing out banks during an economic crisis

e. Congress raising taxes on the rich during an expansion

Sheila's Marginal Propensity to Consume is 0.75, her autonomous consumption is $8,000 and she consumes $68,000 worth of goods. How much is Sheila saving?

Select one:

a. She is saving $4,000

b. She is saving $8,000

c. She is saving $10,000

d. She is saving $12,000

e. She is saving $14,000

According to Keynesians, what should the government do if unemployment is 3.5% and inflation is 8%?

Select one:

a. Decrease the supply of money

b. Lower income and corporate taxes

c. Lower government spending

d. Raise interest rates

e. Do nothing

The State of South Carolina is required to balance its budget. As a result:

Select one:

a. The state government must spend less money when the economy does well

b. The state government must spend more money when the economy does poorly

c. The state government must reduce its spending when the economy does poorly

d. The state government must increase spending by a constant amount every year

e. The state government has to keep spending the same no matter what happens in the economy

Explanation / Answer

(1) (a)

A pro-cyclical policy variable is positively correlated and directly linked to the phase of business cycle that the economy is in, and such a policy will magnify the fluctutions. If required reserves ratio is lowered during expansion, money supply further rises, increasing aggregate demand by a higher amount.

(2) (d)

Total Consumption (C) = Autonomous consumption + MPC x Income (Y)

68,000 = 8,000 + 0.75Y

0.75Y = 60,000

Y = 80,000

Savings = Y - C = 80,000 - 68,000 = 12,000

(3) (c)

In this case unemployment is low and inflation is high, signifying aggregate demand (AD) is very high, leading to higher real GDP, higher output and lower unemployment. To lower inflation, government has to deploy contractionary fiscal policy, which can be done by lowering government spending.

(4) (c)

In a balanced budget, government spending equals tax revenue. When economy is in a poor state, real GDP is low, so tax revenue falls. To keep the budget balanced, government has to lower its spending.

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