1. Fill in the blanks for the following sentence: A rise in taxes on households will shift AD to the, this will push.

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1 Homework Fill in the blanks for the following sentence: A rise in taxes on households will shift AD to the, this will push. A. right; down B. left; down C. left; up D. right; up 2. During a recession, the State of New York hires 1,000 new trash collectors. The state legislature in Albany takes six months to pass a law to hire the new trash collectors, and because of government rules and paperwork, the government actually hires the workers 18 months after the recession has begun. This story is an example of the following limit of fiscal policy: A. a drop in the bucket B. crowding out C. a matter of timing D. None of these answers. 3. Which of the following situations is an automatic stabilizer in the U.S. economy? i = Consumers usually spend some of their savings and eat food from the pantry during recessions; ii = Governments automatically transfer cash to the unemployed when the economy is weak; iii = When Americans have less demand for U.S. manufactured products, foreigners might pick up some of the slack, buying these unsold U.S.-made goods. A. All three situations are automatic stabilizers. B. Only iii is an automatic stabilizer. C. Only i is an automatic stabilizer. D. Only ii is an automatic stabilizer. 4. Why was the Great Depression an especially appropriate time to use fiscal policy rather than monetary policy alone? A. The Great Depression was primarily caused by a productivity shock rather than a reduction in AD. There were many unemployed resources and therefore there was a large risk of crowding out. B. The Great Depression was primarily caused by a reduction in AD rather than by a productivity shock. There were many unemployed resources and therefore a large risk of crowding out. C. The Great Depression was primarily caused by a productivity shock rather than a reduction in AD. There were many employed resources and therefore there was less risk of crowding out.

2 D. The Great Depression was primarily caused by a reduction in AD rather than by a productivity shock. There were many unemployed resources and therefore there was less risk of crowding out. 5. Which kind of aggregate demand shift has a shorter lag? A. Monetary policy B. Price Floor policy C. Fiscal policy D. Price Ceiling policy. 6. Using the figure below, suppose that a change in fiscal policy shifts AD from AD(1) to AD(2). Which response below would be most likely to cause that shift? A. a fall in taxes OR a fall in government spending B. a fall in taxes OR a rise in government spending C. a rise in taxes OR a rise in government spending D. a rise in taxes OR a fall in government spending 7. Which of the following government policies are automatic stabilizers for the economy? A. None of these answers. B. temporary tax cuts that Congress passes when bad economic news hits C. unemployment insurance D. temporary spending increases that Congress passes when bad economic new hits

3 8. According to recent estimates by Susan Woodward and Robert Hall, an extra dollar of government purchases raises GDP by an extra dollar-so there is little evidence for a multiplier effect in the short run, but also little evidence for crowding out in the short run. Let's use these estimates as a rule of thumb to solve the following economic puzzles: Canadian GDP is about $1.2 trillion (U.S. dollars). If Canadian GDP is 3 percent above its Solow growth rate, and the Canadian Parliament wants to change government purchases to return to the Solow growth rate, what changes in government purchases should it enact, measured in U.S. dollars? A. decrease of $36 billion B. increase of $36 billion C. decrease of $3 billion D. decrease of $6 billion 9. The best case scenario for fiscal policy to prevent a possible recession, as a result of a decrease in consumption, is A. for the Fed to decrease the supply of money. B. for the U.S. President to appoint a special task force to lobby Congress to increase taxes and decrease government spending. C. for Congress to legislate a significant tax cut and to pass legislation stimulating and increasing government spending. D. for Congress to deliberate for 10 to 15 months, waiting to see if a recession is in fact occurring. 10. The multiplier effect from expansionary policy A. always works with expansionary fiscal policy. B. holds AD constant. C. is the decrease in AD caused when expansionary fiscal policy decreases income and thus consumer spending. D. is the magnitude of the increase in AD caused when expansionary fiscal policy increases income and thus consumer spending. 11. President Bush's tax rebate in 2008 was A. more powerful in stimulating consumer spending than anticipated because most taxpayers used their rebate check for purchases of goods and not to pay down their debt. B. less powerful in stimulating consumer spending than anticipated because most taxpayers used their rebate check to pay down their existing debt rather than to increase their spending. About $68 billion of $78 billion total rebate was used by consumers to reduce their debt rather than to increase their spending, resulting in a small net fiscal stimulus. C. declared unconstitutional by the Supreme Court. D. opposed by Congress.

4 12. The four limits of fiscal policy are: A. crowding out, a drop in the bucket, a matter of timing, and real shocks. B. lowering taxes, abolishing tax rebates, increasing investment tax credits, and selling bonds. C. raising taxes, selling bonds, increasing government spending, and increasing tax rebates. D. tax cuts, tax rebates, decreasing investment tax credits, and open market operations. 13. The case for fiscal policy is strongest is when the economy A. was hit with a real shock. B. is at full employment. C. is approaching a recession when aggregate demand is too low. D. is experiencing high inflation. 14. What is the relationship between monetary and fiscal policy lags? A. Monetary policy is subject to lags, but fiscal policy is not subject to lags. B. Monetary policy is not subject to lags, but fiscal policy is subject to lags. C. Monetary policy is also subject to lags, but these are generally longer than for fiscal policy. D. Monetary policy is also subject to lags, but these are generally shorter than for fiscal policy. 15. What impact do automatic stabilizers have on aggregate demand? A. Automatic stabilizers cause aggregate demand to become very volatile. B. Automatic stabilizers keep aggregate demand on a steady and regular course. C. Automatic stabilizers cause aggregate demand to deviate from a steady course. D. Automatic stabilizers have no effect on aggregate demand. 16. If taxpayers were given a rebate, what impact would this have on the aggregate demand curve? A. If taxpayers spend the extra money from a rebate, aggregate demand shifts up and to the left. B. If taxpayers spend the extra money from a rebate, aggregate demand shifts down and to the left. C. If taxpayers spend the extra money from a rebate, aggregate demand shifts up and to the right. D. If taxpayers spend the extra money from a rebate, aggregate demand shifts down and to the right.

5 17. What was Keynes' central theorem in The General Theory? A. the importance of fiscal policy in response to a real shock B. the importance of monetary policy in response to an aggregate demand shock C. the importance of fiscal policy in response to an aggregate demand shock D. the ineffectiveness of fiscal policy in response to an aggregate demand shock 18. What effect does crowding out have on the effectiveness of fiscal policy? A. Crowding out increases the effectiveness of fiscal policy. B. Crowding out reduces the effectiveness of fiscal policy. C. Crowding out has an indeterminate impact on the effectiveness of fiscal policy. D. Crowding out has no effect on the effectiveness of fiscal policy. 19. What is the relationship between fiscal policy and using it to combat a real shock? A. Fiscal policy is more effective at combating a real shock. B. Fiscal policy is less effective at combating a real shock. C. Fiscal policy has an indeterminate impact on combating a real shock. D. Fiscal policy has no impact on combating a real shock. 20. Approximately what impact on annual GDP do economists expect the $900 billion stimulus of 2009 to have? A. 16% B. 8% C. 4% D. 2% 21. Suppose that Congress has received some troubling data on the economy, and want to pass a stimulus package. However, the economic benefit of this is stalled due to bickering between the elected parties. What would best describe this issue? A. This is a case of a recognition lag. B. This is a case of a effectiveness lag. C. This is a case of a implementation lag. D. This is a case of a legislative lag. 22. Suppose that private spending decreases when government spending increases. Which of the following best describes this issue?

6 A. automatic stabilizers B. Ricardian equivalence C. crowding out D. the multiplier effect 23. Suppose that there are changes in fiscal policy that stimulate AD in a recession without the need for explicit action by policy makers. Which of the following best describes this issue? A. the multiplier effect B. automatic stabilizers C. Ricardian equivalence D. crowding out 24. If people choose to save during good times, and use their savings to tide them over in bad times, how could we describe this economic behavior? A. This is an example of automatic stabilizers. B. This is an example of crowding out. C. This is an example of the multiplier effect. D. This is an example of Ricardian equivalence. 25. Imagine that the government has decided to build new highways and bridges in an effort to replace infrastructure, and simultaneously stimulate the economy. The bill has been passed and signed, however, the contractors are not paid until the job is completed, thus delaying the economic benefit. Which of the following would best characterize this issue? A. This is an example of an effectiveness lag. B. This is an example of an implementation lag. C. This is an example of a recognition lag. D. This is an example of a legislative lag. 26. Imagine that the government is striving to actively manage the economy, but does not have timely data on economic activity. Which of the following would best characterize this issue? A. This is an example of an implementation lag. B. This is an example of an effectiveness lag. C. This is an example of a recognition lag. D. This is an example of a legislative lag. 27. Imagine that the government believes the economy has stalled, so a stimulus bill is passed to

7 spend $800 billion. However, there are no specific plans on how to spend the money, so legislators are considering many potential products. Which of the following would best characterize this issue? A. This is an example of a legislative lag. B. This is an example of an implementation lag. C. This is an example of a recognition lag. D. This is an example of an effectiveness lag. 28. What impact does the multiplier have on an increase in G, and therefore on C and AD? A. An increase in G stimulates C so the decrease in AD can be smaller than the increase in G B. An increase in G stimulates C so the increase in AD can be larger than the increase in G C. An increase in G stimulates C so the decrease in AD can be larger than the increase in G D. An increase in G stimulates C so the increase in AD can be smaller than the increase in G 29. Fiscal policy involving is designed to influence business cycle fluctuations. A. All of the answers are correct. B. government spending C. government borrowing D. the taxation of income 30. Economists believe that government spending sometimes increases growth for all of these reasons except: A. spending can lower inflation and keep prices and wages steady. B. spending can increase consumer confidence. C. spending can put all of the factors of production to greater use. D. spending can encourage additional private investment.

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