QUESTION 1 A) policy is designed to shift the aggregate B) curve by the federal

Question

QUESTION 1

A) policy is designed to shift the aggregate B) curve by the federal government changing its C) and D) policies. An E) fiscal policy would attempt to shift this curve to the F). This would be accomplished by the government spending G) than it took received in taxes. Such a policy would result in a budgetary H). An expansionary policy would be employed to get the economy out of a I) and fight the undesirable economic phenomenon of J).

20 points   

QUESTION 2

On the other hand, A) fiscal policy could be used to slow the economy down by shifting the AD curve to the B). This would require that the government take in more in C) than it injected into the economy through government D). The government would want to slow the economy down in order to fight E). The result of this policy would be a budgetary F).

12 points   

QUESTION 3

A) fiscal policy refers to deliberate, purposeful changes to shift the AD curve. But some portion of fiscal policy is also B). This results from the fact that the amount that the federal government must C), and the amount that it takes in in D), are also affected by changes in the level of E) activity.

10 points   

QUESTION 4

For example, if the GDP falls, A) receipts will B). That’s because both household C) and corporate D) will go E). This would likely lead to a budgetary F). Or, conversely, if the economy were to speed up causing the GDP to G), federal revenues from both income and corporate H) would I). This would likely lead to a budgetary J).

20 points   

QUESTION 5

The government finances the budgetary deficit by A) from the public (through the sale of B) issued by the U.S. Treasury), or from other countries (such as China), or from the Federal Reserve System (we’ll get into that in the next module). People holding U.S. government Treasury Bills, Treausry notes and Treasury bonds are C) (lenders/borrowers – fill in the number from the word bank) to/from the federal government. The total amount owed by the federal government is known as the D) debt. Currently, about E)% (fill in whole number – no decimals or percentage sign) of this debt is held by foreigners or foreign countries. Not only must the government pay back this debt, but it also must pay F) while it holds the lenders money. In 2012, the interest on this debt was G) $ billion (fill in whole number).

14 points   

QUESTION 6

There are a number of substantive problems associated with fiscal policy. The first is an issue of A), in the form of:

B) lag – the time between realizing an economic change is happening and the implementation of the counter-cyclical policy.

C) lag – the time it takes for Congress to pass a budget and the president to sign it.

D) lag – the time between the implementation of the policy and the economy’s response to the policy.

8 points   

QUESTION 7

Another problem is that, because fiscal policy must be passed by Congress, it has become a A) tool, designed to get Congresspersons reelected, rather than a purely economic tool. As a result, budgetary B) are the norm and budgetary C) the rare exception.

6 points   

QUESTION 8

Also, although budgetary deficits are designed to shift the aggregate demand curve to the right, it also A) the demand for loanable funds in the financial sector of the economy. This could cause real B) rates to C). The effect would be that D) spending by firms would fall, thereby offsetting (to a degree) the intended effect of policy. This phenomenon is known as the E) effect.

Explanation / Answer

Question 1

Federal government generally undertakes fiscal policy to influence economy by altering aggregate demand. Fiscal policy is implemented by the government through changes in its expenditure and taxation policies.

During recession, federal government undertakes expansionary fiscal policy. Under this policy, a government increase it’s spending is such a manner that it becomes greater than tax revenue resulting in a budget deficit.

The basic premise behind such policy is that increase in government spending will boost aggregate demand which in result leads to rightward shift of aggregate demand curve resulting in increase in real GDP. This will pull the economy out of recession and would decrease unemployment.

Thus,

A) Fiscal policy is designed to shift the aggregate B) demand curve by the federal government changing its C) expenditure and D) taxation policies.

An E) expansionary fiscal policy would attempt to shift this curve to the F) right. This would be accomplished by the government spending G) more that it took received in taxes. Such a policy would result in a budgetary H) deficit.

An expansionary policy would be employed to get the economy out of a I) recession and fight the undesirable economic phenomenon of J) unemployment.

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