26. The multiplier concept is important because it shows: O why fiscal policy is

Question

26. The multiplier concept is important because it shows: O why fiscal policy is always effective. O how small changes in government spending may have large impacts on overall output. O how changes in taxes are multiplied into larger government revenues O why decreases in the tax rate may actually increase tax revenues overal 27. What are the four major limits to fiscal policy? crowding out, a drop in the bucket, a matter of timing, and real shocks O poor information, the multiplier effect, the bandwagon effect, and election timing O sticky wages, Ricardian equivalence, recognition lag, and crowding out O aggregate demand deficiency, unemployed resources, long-run expenses, and implementation lag 28. The crowding out effect of fiscal policy refers to: O the decrease in private spending as a result of higher government spending O the decrease in real GDP growth as a result of higher government spending. O how more federal government spending affects the sizes of state and local governments the increase in tax revenues as a result of an increase in government spending 29. Government spending is a more effective policy tool when: O the economy is above the LRAS curve. O the government raises taxes to finance spending. O consumers are pessimistic and not spending interest rates in the economy are rising simultaneously 30. Fiscal policy is MOST effective in keeping both inflation and real growth stable when there is a O shock to the LRAS curve O shock to aggregate demand. O real shock change in expected inflation that shifts the SRAS curve.

Explanation / Answer

26. The multiplier concept is important because it shows why small changes in government spending may have large impacts on overall output. So correct option is B.

27. Crowding effect, A drop in the Bucket, a matter of timing and real shocks are four major limits to fiscal policy. So correct option is A.

28. The crowding out effect of fiscal policy refers to the decrease in private spending as a result of higher government spending. So correct option is A.

29. Government spending is a more effective policy tool when consumers are pessimistic and not spending. So the correct option is C.

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