Macroeconomics Machine-graded Assessment Items Module: Policy Application

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1 Macroeconomics Machine-graded Assessment Items Module: Policy Application Machine-graded assessment question pools are provided for your reference and are organized by learning outcome. It is your responsibility to handle this material securely and appropriately, with proper security to prevent the quiz questions and answers from being widely available and searchable via the Internet. Send any comments or feedback to Use an understanding of the strengths and weakness of fiscal and monetary policy to determine an appropriate stabilization policy for a given macroeconomic situation (moderate slowdown, severe slowdown, overheating, etc) Short Title: Policy Application Understand the Keynesian View on Changes in Government Spending and Taxation Short Title: Keynesian Policy Prescriptions 11.1.a.0 Explain the implications of a Liquidity Trap Short Title: Liquidity Trap 11.1.a.1 A liquidity trap exists when a change in money supply: is able to increase the interest rate. is able to lower the interest rate. is unable to affect the interest rate.* // Content page Reading: Liquidity Trap 11.1.a.2 Which of the following could be potential solutions to the liquidity trap? increase money supply sell government bonds quantitative easing* // Content page Reading: Liquidity Trap // Updated 10/16/2015 scoring corrected 11.1.a.3 Which of the following statements is NOT true when considering the liquidity trap and consumers? They are risk aversive. They hold on to their money. They believe the price of nonmonetary assets will rise.* // Content page Reading: Liquidity Trap

2 11.1.b.0 Explain the significance of the Expenditure Multiplier Short Title: The Expenditure Multiplier 11.1.b.1 Why is the effect of a government expenditure multiplier transmitted throughout the economy? Because government spending changes the interest rate. Because there is no change in taxes. Because government spending generates a change in income, which generates a change in consumption spending which generates a change in income, etc. * // Content page Reading: The Expenditure Multiplier // Updated 10/16/2015 answer choice edited 11.1.b.1 In the Keynesian model, the government can respond to a recessionary or inflationary gap by: changing autonomous spending.* changing the quantity of money. relying on the spending multiplier to generate a change in real GDP that is a multiple of the change in autonomous spending.* // Content page Reading: The Expenditure Multiplier 11.1.b.2 If government spending decreased by $10 million, aggregate demand would decrease by: $10 million. less than $10 million. more than $10 million.* // Content page Reading: The Expenditure Multiplier // Updated 10/16/2015 question edited 11.1.b.3 If GDP was $100 million below potential GDP, what should the government do to bring it back to equilibrium? Raise government spending by $100 million. Raise government spending by something less than $100 million.* Do nothing. // Content page Reading: The Expenditure Multiplier // Updated 10/16/2015 answer choice wording improved 11.1.c.0 Explain how Crowding Out weakens the effectiveness of fiscal policy Short Title: Crowding Out Complete the following sentence. Holding all else constant while government is borrowing to cover budget deficits, the crowding out concept suggests: interest rates rise and investment expenditures rise. interest rates rise and investment expenditures fall.* interest rates fall and investment expenditures fall. interest rates fall and investment expenditures rise.

3 11.1.c.1 Holding all else constant while government is borrowing to cover budget deficits, the crowding out concept suggests interest rates borrowing and spending by business and households. rise and discourage* rise and encourage fall and discourage fall and encourage // Content page Reading: Crowding Out 11.1.c.2 A country s economic data indicates that there has been a substantial reduction in the financial capital available to be borrowed by private sector firms. Which of the following is the most likely cause of this situation? Especially large and sustained household saving. Increased influx of funds by foreign financial investors. Especially large and sustained government borrowing. * // Content page Reading: Crowding Out // Updated 10/16/2015 question edited and distractor removed 11.1.c.3 From a macroeconomic point of view, which of the following is a source of demand for financial capital? savings by households and firms foreign financial investment domestic household private savings government borrowing* 11.1.c.4 An increase in government borrowing can: crowd out private investment.* increase the incentive for private investment. cause a substantial decrease in interest rates. // Content page Reading: Crowding Out // Updated 10/16/2015 answer choice edited 11.1.c.5 A reduction in government borrowing can: decrease the incentive to invest. increase the interest rate. crowd out private investment. give private investment an opportunity to expand.* // Content page Reading: Crowding Out // Updated 10/16/2015 answer choice edited An increase in government autonomous spending may result in which of the following? Crowding out of private investment.* A decline in the interest rate. Deficit reduction. Reduced government borrowing. // Content page Reading: Crowding Out

4 // Updated 10/16/2015 question and answer choices edited 11.1.c.6 A contractionary fiscal policy may result in which of the following? Crowding out of private investment. Lower interest rates.* Reducing the deficit. Reducing government borrowing. // Content page Reading: Crowding Out Understand the effects of tax and spending policy from a neoclassical perspective Short Title: Neoclassical Policy Prescriptions 11.2.a.0 Explain the features of Supply- Side Economics Short Title: Supply- Side Economics 11.2.a.1 Former President Ronald Reagan was a supporter of supply side economics. Supply side economists believe that: increasing tax rates decreases demand. reducing tax rates increases supply.* reducing tax rates increases demand. // Content page - Reading: Supply- Side Economics // Updated 10/16/2015 question and answer choices wording improved 11.2.a.2 One of the arguments in favor of supply side approaches to economic growth calls for: reductions in tax rates paid by businesses operating in specific market, as they will bring about higher unemployment rates in the macroeconomy. reductions in tax rates paid by businesses operating in specific market, as they will bring about lower unemployment rates in the macroeconomy.* increases in tax rates paid by businesses operating in specific markets, as they will bring about lower unemployment rates in the macroeconomy. increases in tax rates paid by businesses operating in specific market, as they will bring about higher inflation rates in the macroeconomy a.3 A supply side economist would advocate reducing tax rates to encourage: people to work more hours.* businesses to increase investment spending.* consumers to spend less. // Content page - Reading: Supply- Side Economics // Updated 10/16/2015 answer choices wording improved A supply side policy to address a recession would likely: provide tax cuts rather than increased government spending.* provide tax cuts and increased transfer payments such as unemployment benefits.

5 enact policies that stimulate aggregate supply rather than aggregate demand.* // Content page - Reading: Supply- Side Economics 11.2.b.0 Explain how policy lags weaken the practice of activist fiscal and monetary policies. Short Title: Policy Lags 11.2.b.1 will often cause monetary policy to be considered counterproductive because it makes it hard for the central bank to know when the policy will take effect. Altering the discount rate Reserve requirements Long and variable time lags * Quantitative easing // Content page - Reading: Policy Implications of the Neoclassical Perspective: Policy Lags An execution policy lag describes the length of time it: requires to enact a monetary or fiscal policy.* takes before policy makers recognize that a recession or expansion is occurring. it takes for a policy change to be implemented. // Content page - Reading: Policy Implications of the Neoclassical Perspective: Policy Lags A recognition policy lag describes the length of time it. takes before policy makers recognize that a recession or expansion is occurring.* requires to enact a monetary or fiscal policy. requires for policy impacts to be recognized. // Content page - Reading: Policy Implications of the Neoclassical Perspective: Policy Lags 11.2.b.2 Why does the legislative lag influence fiscal policy effectiveness? Because it takes time to collect data on the current state of the economy. Because it takes time for Congress to pass a bill.* Because it takes time to evaluate differences between states of the economy. Because it takes time for interest rates and bond prices to change. // Content page - Reading: Policy Implications of the Neoclassical Perspective: Policy Lags // Updated 10/16/2015 question and answer choices edited 11.2.b.3 Why does the recognition lag influence fiscal policy effectiveness? Because it takes time to collect data on the current state of the economy.* Because it takes time to agree on a resolution. Because it takes time to evaluate differences between states of the economy. Because it takes time for interest rates and bond prices to change. // Content page - Reading: Policy Implications of the Neoclassical Perspective: Policy Lags 11.2.b.4 Why does the impact lag influence monetary policy effectiveness?

6 Because it takes time to collect data on the current state of the economy. Because it takes time to agree on a resolution. Because it takes time to evaluate differences between states of the economy. Because it takes time for businesses to change investment spending decisions.* // Content page - Reading: Policy Implications of the Neoclassical Perspective: Policy Lags // Updated 10/16/2015 answer choices edited 11.2.c.0 Explain why the Neoclassical economists believe there is no Phillips Curve tradeoff Short Title: No Phillips Curve Tradeoff 11.2.c.1 In the long run, the Phillips curve will be at the natural rate of unemployment. a vertical line* a horizontal line upward sloping // Content page Reading: Policy Implications: No Phillips Curve Tradeoff 11.2.c.2 The neoclassical perspective believes there is no Phillips curve tradeoff, because: prices are fully flexible.* the natural rate of unemployment is determined by labor market conditions separate from the mechanism that determines prices.* changes in aggregate demand affect prices. // Content page Reading: Policy Implications: No Phillips Curve Tradeoff // Updated 10/16/2015 answer choices wording improved 11.2.c.3 In a neoclassical economist s world, an increase in taxes will: raise the level of GDP. increase the natural rate of unemployment. lower the price level. * // Content page Reading: Policy Implications: No Phillips Curve Tradeoff // Updated 10/16/2015 answer choices wording improved 11.2.d.0 Explain the features of New Classical economics and the theory of Rational Expectations Short Title: New Classical Economics and Rational Expectations 11.2.d.1 The theory of assumes that individuals will use all information available to them to form the most accurate possible expectations about the future. adaptive expectations rational expectations * Keynesian economics naïve expectations // Content page New Classical Economics and Rational Expectations // Updated 10/16/2015 answer choices edited

7 At a macroeconomic level, the theory of rational expectations points out that if the is vertical over time, then people should rationally expect this pattern. A. GDP B. Phillips curve * C. aggregate demand curve D. aggregate supply curve * 11.2.d.2 If the theory of rational expectations is correct, then the is vertical over time. Phillips curve should be vertical* aggregate demand curve should be vertical aggregate supply curve should be horizontal // Content page New Classical Economics and Rational Expectations // Updated 10/16/2015 question and answer choices edited 11.2.d.3 When a shift in occurs, rational expectations hold that its impact on output and employment will only be minimal. aggregate demand * aggregate supply wage levels price levels // Content page New Classical Economics and Rational Expectations 11.2.d.4 The theory of rational expectations implies what about the Phillips Curve? Inflation and unemployment are inversely (or negatively) related. When one goes up, the other goes down. Inflation and unemployment are directly (or positively) related. When one goes up, the other goes up. Inflation and unemployment have no relationship. When inflation goes up, unemployment stays the same. * 11.2.d.4 New classical economists believe that a contractionary monetary policy can be effective: expect higher interest rate and lower prices, and therefore spend more on consumption and investment. because household and businesses expect higher interest rates and lower prices, and therefore do not change their consumption and investment. when households and businesses do not expect higher interest rates or lower prices, and therefore reduce their consumption and investment.* // Content page New Classical Economics and Rational Expectations 11.2.d.5 Neoclassical economists believe which of the following statements about the Phillips Curve? There is a trade- off between inflation and unemployment. There may be a trade- off between inflation and unemployment in the short run, but there is no trade- off in the long run. * There is no trade- off between inflation and unemployment. *

8 New Classical economists believe fiscal policy is ineffective because any increase in government spending will cause: households to spend less. * private individuals to save more. * business investment to fall. // Content page New Classical Economics and Rational Expectations 11.2.d.6 After reports of the subprime mortgage crisis began to appear in the media, which of the following most likely caused housing prices to fall? neoclassical theory cyclical expectations rational expectations * Keynesian theory // Content page New Classical Economics and Rational Expectations 11.2.d.7 Keynesian economists believe which of the following statements about the Phillips Curve? There is a trade- off between inflation and unemployment. * There is a trade- off between inflation and unemployment in the short run, but there is no trade- off in the long run. There is no trade- off between inflation and unemployment d.8 Which of the following is a valid criticism of the rational expectations theory? price changes can happen before the events that cause them. most people lack the information necessary to form rational expectations. * people understand the underlying economic processes in a situation adjustment of wages and prices might be quite rapid New classical economists argue that a tax cut does not shift the aggregate demand curve because: consumers anticipate the effect of an increase in government debt on future taxes.* households reduce their consumption so they can pay afford to pay higher taxes in the future.* prices are inflexible, so real GDP does not change. // Content page New Classical Economics and Rational Expectations 11.2.e.0 Explain how the theory of Ricardian Equivalence weakens the effectiveness of activist fiscal policy Short Title: Ricardian Equivalence 11.2.e.1 If Ricardian Equivalence theory holds completely true, then any change in budget deficits or budget surpluses would be completely offset by which of the following? A change in currency exchange rates. A sustained pattern of trade imbalances.

9 A corresponding change in private saving. * A dependence on inflows of capital. // Content page Reading: Ricardian Equivalence: How Government Borrowing Affects Private Savings 11.2.e.2 Ricardian equivalence means that changes in: private savings offset any changes in the government deficit. * exports offset any changes in the government deficit. imports offset any changes in the government deficit. investment offset any changes in the government deficit. // Content page Reading: Ricardian Equivalence: How Government Borrowing Affects Private Savings 11.2.e.3 Suppose you are analyzing data for an economy in which Ricardian equivalence holds true. If the budget deficit increases by 50, then: investment will increase by 50 or more. investment will decrease by 50 or less. private savings will decrease by 50 or more. private savings will increase by 50 or less.* // Content page Reading: Ricardian Equivalence: How Government Borrowing Affects Private Savings // Updated 10/16/2015 question and answer choices edited 11.2.f.0 Compare and contrast Keynesian and Neoclassical approaches to addressing inflation, recession, and unemployment Short Title: Policy Implications: Inflation, Recession, and Unemployment 11.2.f.1 To decrease inflation, a Keynesian would propose the following policies: Decrease Aggregate demand.* Increase government spending. Decrease money supply.* A neoclassical policy to address unemployment is likely to: try to reduce the natural rate of unemployment.* help to reduce obstacles that create frictional unemployment.* offer larger or longer benefits for those who are unemployed. // Content page Reading: Policy Implications: Inflation, Recession, and Unemployment 11.2.f.2 In a recessionary period of low economic output, a Neoclassical economist would: propose increases in the supply of money. believe the economy will eventually rebound.* propose increases in government spending. // Content page Reading: Policy Implications: Inflation, Recession, and Unemployment // Updated 10/16/2015 question and answer choices edited

10 To decrease short- run unemployment, a Keynesian (respectively Neoclassical) economist would propose the following policies: 1. Both would suggest an increase in aggregate demand by decreasing taxes.* 1. Keynesian would suggest an increase government spending and a Neoclassical will suggest doing nothing because the labor market will correct itself.* 1. A Keynesian would suggest increasing government spending, Neoclassical will suggest tax rebates that stimulate productivity growth.* 11.2.f.3 How would Keynesian and Neoclassical economics propose dealing with cyclical unemployment? Both would suggest an increase in aggregate demand by increasing government spending. Keynesians would suggest an increase government spending, while Neoclassicals would suggest doing nothing because the labor market will correct itself.* Keynesians would suggest increasing government spending, while Neoclassicals would suggest tax rebates that stimulate productivity growth and labor demand.* // Content page Reading: Policy Implications: Inflation, Recession, and Unemployment // Relocated from enabling outcome Practical Problems with Discretionary Fiscal Policy 10/16/2015 A limitation of a countercyclical fiscal policy is that: it has a longer impact lag than monetary policy. higher taxes and lower spending can be politically difficult to achieve during economic booms.* there is a long time lag between recognizing a recession and implementing a countercyclical policy.* // Content page Reading: Policy Implications: Inflation, Recession, and Unemployment // Relocated from enabling outcome Practical Problems with Discretionary Fiscal Policy 10/16/2015 A limitation of countercyclical fiscal policies is that: given uncertainty, it can be difficult to target specific economic objectives.* automatic stabilizers must be enacted by congress to go into effect. they are typically less effective than countercyclical monetary policy. // Content page Reading: Policy Implications: Inflation, Recession, and Unemployment // Relocated from enabling outcome Practical Problems with Discretionary Fiscal Policy 10/16/ Identify appropriate macro policy options in response to the state of the economy. Short Title: Real World Macro Policy Options Which policy choice would both Keynesians and Neoclassicals agree would boost GDP and employment? a tax cut * an increase in government spending an increase in the money supply (or expansionary monetary policy) Which policy choice would both Keynesians and Neoclassicals agree would reduce GDP and employment? a tax increase * an decrease in government spending a decrease in the money supply (or contractionary monetary policy).

11 Experience in the 1970 s suggested that: monetary policy is not useful to combat recession. recessions can be cause by shifts in both the short run supply curve and the aggregate demand curve.* Keynesian aggregate demand policies are the most important policy tools to address recessions. // Content page Reading: Introduction to Real World Macro Policy Options Suppose the economy experiences a surge in exports. What is the likely impact on the aggregate price level (P) and the level of real GDP (Q)? P will rise and Q will fall. P will fall and Q will rise. P will rise and Q will rise.* The experience of the Great Recession showed that when the economy is in a recession, the government can increase its spending: at the risk of crowding out private investment. with minimal risk of crowding out private investment.* without a need to rely on the expenditure multiplier effects. // Content page Reading: Introduction to Real World Macro Policy Options Suppose the economy experiences a surge in exports. What is the likely impact on interest rates and investment expenditure? Interest rates will rise and investment will fall.* Interest rates will rise and investment will rise. Interest rates will fall and investment will fall. During a recession, government investment in physical capital: helps increase the output and productivity of an economy.* always generates positive returns to investment. has a risk of crowding out private investment in physical capital.* // Content page Reading: Introduction to Real World Macro Policy Options Suppose the economy experiences a surge in exports. What is the likely to occur? The level of real GDP (Q) will rise.* Interest rates will rise.* Investment expenditure (I) will fall.* Suppose the economy experiences a surge in imports. What is the likely impact on the aggregate price level (P) and the level of real GDP (Q)?

12 P will rise and Q will fall. P will fall and Q will rise. P will fall and Q will fall. * Suppose the economy experiences a surge in imports. What is likely to occur? The level of real GDP (Q) will fall. * The aggregate price level (P) will fall. * Interest rates will fall. * Suppose the economy experiences a surge in imports. What is likely to occur? The level of real GDP (Q) will fall. * Interest rates will rise. Investment expenditure (I) will rise. Effective government policies to promote long term economic growth might include(s): government unemployment benefits. regulations that provide patent protection.* government investments in a pre- K program.* // Content page Reading: Introduction to Real World Macro Policy Options Government investment in capital include(s): physical capital investments such as roads and bridges.* human capital investments such as primary education.* financial capital investments such as government bonds. // Content page Reading: Introduction to Real World Macro Policy Options 11.3.a.0 Identify the lessons macroeconomists learned from the 1970s Short Title: Lessons from the 1970s 11.3.a.1 The experience of the 1970s taught economists that changes in: aggregate supply can affect the economy in the short run. * aggregate demand can affect the economy in the long run. both aggregate demand and aggregate supply are important in understanding changes in the economy in the short run.* // Content page - Reading: Lessons from the 1970s // Updated 10/16/2015 answer choice edited 11.3.a.2 Keynesian economists concluded from the experience of the 1970s that: fiscal fine- tuning of the economy is difficult to accomplish effectively. * stabilization policy is never effective using monetary tools.

13 inflation makes stabilization policy easier to accomplish. The American economy during the 1970's demonstrated that: A. stabilization was going to be difficult when short- run aggregate supply was not stable.* B. fiscal policy provided a quick, nimble way to counter short- term supply shocks. C. stabilization policy cannot be effective using only monetary tools. // Content page - Reading: Lessons from the 1970s // Removed 10/26/ a.3 The experience of the 1970 s led Keynesian economists to understand that monetary policy was: more effective than previously believed. * less effective than previously believed. rarely effective. // Content page - Reading: Lessons from the 1970s // Updated 10/16/2015 question edited 11.3.b.0 Explain how public investment can avoid crowding out. Short Title: Crowding Out Revisited Deficit spending may not cause a crowding out problem, if: The deficit is caused by government investment in infrastructure. * The deficit is caused by tax cuts on private investment. * The deficit is caused by government spending on national defense b.1 Government investment in physical capital improvements may not cause a crowding out problem, if: the economy is in deep recession and savings are sitting idle. * it is financed by deficit spending. it is financed by higher taxes or other budget cuts.* // Content page - Reading: Crowding Out Revisited 11.3.b.2 Crowding out can be minimized, if at the same time that the government increases spending, it: conducts an open market purchase. raises taxes.* increases it deficit. // Content page - Reading: Crowding Out Revisited // Updated 10/16/2015 question and answer choices edited 11.3.b.3 The crowding out argument ignores the possibility of: the government spending multiplier. idle private savings due to a recession.* interest rates rising. // Content page - Reading: Crowding Out Revisited // Updated 10/16/2015 answer choices edited

14 11.3.c.0 Identify practical problems with discretionary fiscal policy Short Title: Practical problems with discretionary fiscal policy 11.3.c.1 Tax cuts that are explicitly temporary have less impact than permanent ones because: individuals and businesses do not change their behavior very much, since they do not expect the tax cuts to last.* temporary tax cuts are usually smaller than permanent ones. temporary tax cuts always have less effect on the budget deficit than permanent ones do. // Content page - Reading: Practical Problems with Discretionary Fiscal Policy // Updated 10/16/2015 answer choice wording improved 11.3.c.2 Structural change refers to: long run changes in the size of sectors in the economy. * short run changes in the way the economy works. the fact that after recovery from recession, the economy does not return exactly where it would have been without the recession occurring. * // Content page - Reading: Practical Problems with Discretionary Fiscal Policy // Updated 10/16/2015 answer choice edited A prolonged period of budget deficits may lead to. A. outflows of financial capital abroad B. lower inflation C. lower economic growth * D. increasing exchange rates 11.3.c.3 Countercylical fiscal policies that stimulate an economy in a recession do not: increase cyclical unemployment while eventually causing inflation. reduce unemployment below the natural rate without eventually increasing inflation* increase unemployment above the natural rate without eventually causing inflation. // Content page - Reading: Practical Problems with Discretionary Fiscal Policy 11.3.c.4 Which of the following events would cause interest rates to increase? An open market sale of bonds* a higher discount rate* lower reserve requirements an open market purchase of bonds 11.3.c.5 When the interest rate in an economy increases, it is likely the result of either: an increase in its budget deficit. * a decrease in the budget deficit. an open market sale of securities by the Fed. *

15 an open market purchase of securities by the Fed c.6 Suppose that a rise in business confidence has led to more investment in the economy and higher levels of output. In the short- run, the rise in aggregate demand will: lower unemployment. * cause government to lower taxes. cause government to increase spending. exports will drop c.7 If the Fed initiates an expansionary monetary policy at the same time that the government budget deficit decreases, then the interest rate will. A. increase B. decrease * C. remain unchanged c.8 If a government s budget deficits are increasing aggregate demand when the economy is already producing near potential GDP, causing a threat of an inflationary increase in price levels, then the central bank may react with: a contractionary monetary policy. * an expansionary monetary policy. a loose monetary policy c.9 If the U.S. economy is producing at a level that is substantially less than potential GDP and the government s budget deficits are increasing aggregate demand, then is not much of a danger. a tight monetary policy an increase in the aggregate price level * international financial investment the central bank s contractionary monetary policy 11.3.c.10 If the government s budget deficit increases while the economy is producing substantially less then potential GDP and expansionary monetary policy is implemented, then any from government borrowing would be from that monetary policy. higher interest rates; largely offset by the lower interest rates * lower interest rates; largely offset by the higher interest rates increase in interest rates; reduced by private sector investment inflationary increase in price level; crowding out private investment

16 11.6.a.0 Understand the effectiveness and limitations of fiscal and/or monetary policy for a given state of the economy. (e.g., politics, lag time, etc.) Short Title: Practical Problems with Discretionary Fiscal Policy 11.6.a.1 A limitation of a countercyclical fiscal policy is that: it has a longer impact lag than monetary policy. higher taxes and lower spending can be politically difficult to achieve during economic booms* there is a long time lag between recognizing a recession and implementing a countercyclical policy.* // Relocated to enabling outcome Policy Implications: Inflation, Recession, and Unemployment 10/16/ a.2 A limitation of a countercyclical fiscal policy is that: the policy can be implemented quickly. the post- cyclical structure of an economy quickly changesit can be difficult to garner political support for increased fiscal spending during a recession.* // Relocated to enabling outcome Policy Implications: Inflation, Recession, and Unemployment 10/16/ a.3 A limitation of countercyclical fiscal policies is that: given uncertainty, it can be difficult to target specific economic objectives.* automatic stabilizers must be enacted by Congress to go into effect. they are typically less effective than countercyclical monetary policy. // Relocated to enabling outcome Policy Implications: Inflation, Recession, and Unemployment 10/16/2015 Challenges with fiscal policy include: A. the possibility of excessive aggregate demand causing unemployment. B. the possibility of insufficient aggregate demand causing inflation. C. finding the political will to undertake contractionary fiscal policy.* D. different preferences within congress as to the specific tax or spending changes desired.* // Content page - Reading: Practical Problems with Discretionary Fiscal Policy Two examples of automatic stabilizers built into fiscal policy are: A. new laws that put in place new jobs programs, like the ones created during the great depression. B. greater claims on the federal unemployment compensation program.* C. tax increases when incomes fall during a recession. D. tax increases when incomes rise during an expansion.* // Content page - Reading: Practical Problems with Discretionary Fiscal Policy Discretionary fiscal policy: A. kicks in quickly and Automatically with changing economic conditions. B. can be expansionary or contractionary.* C. literally requires an act of congress to implement.* // Content page - Reading: Practical Problems with Discretionary Fiscal Policy 11.6.b.0 Choose an appropriate fiscal and monetary policy for a given state of the economy Short Title: Putting It Together: Policy Application

17 // Questions in this section have been relocated to the module Macro Workings. Content and assessment items coverage for this enabling outcome is flagged for improvement for Spring b.1 If the economy is in a recession, appropriate policies to pursue may include: an expansionary monetary policy that shifts the AD curve to the right* an expansionary fiscal policy that shifts the AD curve to the right.* an expansionary fiscal policy that shifts the AD curve to the left b.2 If the economy is in a boom period, appropriate policies to pursue may include: an expansionary monetary policy that shifts the AD curve to the right a contractionary fiscal policy that shifts the AD curve to the left.* an expansionary fiscal policy that shifts the AD curve to the left b.3 If the economy is in a recession, appropriate policies to pursue may include: an expansionary monetary policy that shifts the AS curve to the right an expansionary monetary policy that shifts the AD curve to the right.* an expansionary fiscal policy that shifts the AD curve to the right.*

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