5. What will be the result if counter-cyclical fiscal policy is used to eliminat

Question

5. What will be the result if counter-cyclical fiscal policy is used to eliminate an inflationary gap? A) B) C) It will reduce interest rates, reduce the exchange rate, increase net exports and increase prices. It will increase interest rates, increase the exchange rate, increase net exports and increase prices. It will reduce interest rates, reduce the exchange rate, increase net exports and D) E) reduce prices. It will increase interest rates, increase the exchange rate, increase net exports and reduce prices. It will increase interest rates, reduce the exchange rate, reduce net exports and increase prices. 6. Those who advocate a balanced budget 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 an effective way of avoiding extreme levels of unemployment or inflation. The economy is capable of automatic self-adjustment in response the problems of unemployment and inflation. C) D) Counter cyclical fiscal policy is a powerful and effective tool. E) Government budget deficits are a serious problem. 7. A balanced-budget philosophy would be pro-cyclical in all the following cases except one. Which one is the exception? A) A recessionary gap and a budget deficit. B) An inflationary gap and a budget deficit. C) An inflationary gap and a budget surplus. D) High unemployment and a budget deficit. 8. What should the Bank of Canada do if it wished to reduce the lending of the commercial banks? A) Take actions to reduce the reserves of the commercial banks. B) Take actions to increase the reserves of the commercial banks. C) Buy bonds in the open market. D) All of the above.

Explanation / Answer

5) b) It will increase interest rates, increase the exchange rate, increase net exports and increase prices. It will also decrease the government spending and also aggregate demand will be decreased.

7) b) An inflationary gap and a budget deficit. When it is used to eliminate the deficit the Government spending will fall.

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