8)In 2009-2010 fiscal policy debates, A)Republicans voted against the stimulus p
ID: 1153139 • Letter: 8
Question
8)In 2009-2010 fiscal policy debates,
A)Republicans voted against the stimulus package because they believed that the economy can rely on its self-correcting mechanism. B)Democrats offered to reduce taxes as a part of the stimulus package.
C)Republicans liked the stimulus package and the majority of them voted for it.
9)Which of the following is true?
A)A recessionary gap cannot be closed completely because of sticky wages.
B)Empirical studies show that a recessionary gap can be closed automatically and quickly.
C)Wages decrease dramatically in the time of recession for reasons such as minimum wages, union contacts, and government restrictions. D)Firms do not tend to reduce wages by much during a recession because they are afraid of losing their best workers.
E)Both a and d.
10)Which of the following is true?
A)The multipliers of the government expenditures and taxes are easily calculated by the government.
B)Fiscal policy is usually successful because the government can control most economic variables.
C)Fiscal policy cannot fix the economy overnight because tax and spending policies affect aggregate demand after some time.
D)Consumer spending immediately reacts to income tax cuts.
Explanation / Answer
8) - B) - Democrats offered to reduce taxes as a part of the stimulus package.
Democrats offered to provide tax cuts for people who make up to $200,000 a year because for low and middle income Americans, the money saved will be quickly spent and thus, generating a demand boost in contracting economy. It was because the report released by Labor Department in 2008 depicted that employers had shed more jobs in 2008 than any year between 1945 and 2007.
9) - E) - Both a and d
Sticky wages is a concept which mean that worker's earnings don't adjust quickly to changes in labor market conditions. It is because of many factors like slow demand supply linkage, or workers are much more willing to accept pay raises than cuts or due to union members etc. Therefore, recessionary gap is difficult to close because since the wages will remain same or rises very slowly and due to this, there will not be significant rise in the demand. By this a) is correct and b) is wrong.
Wages is not decreased drastically or suddenly during recession and it reduced slowly if demand doesn't picks up, but never drastically. The reason being that there are restrictions like minimum wages, union contacts etc. Also, company will loose their workers if they will reduce the wages drastically as people will fear and will protest etc. By this d) is correct and c) is wrong.
Thus, e) option is most appropriate which means both a and d are correct.
10) - C) - Fiscal Policy cannot fix the economy overnight because tax and spending policies affect aggregate demand after some time.
A) is wrong because multiplier calculation involves many data like national income, taxes, investment, remittances etc. This take time and sometimes assumption has to be made like money that will come in taxes etc. and thus, not a easy calculation.
B) is wrong because government cannot control most of the economic variables and whether fiscal policy will be successful or not depends on people reaction, their habits, world level scenario, import export conditions etc.
D) is wrong because income tax cuts may or may not lead to consumer spending. It depends on supply side constraints also.
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