Question

Fiscal Policy

1. Which of the following is an appropriate fiscal policy response to a negative GDP gap?

   	a.	raise real interest rates
   	b.	raise income tax rates
   	c.	increase government spending
   	d.	lower real interest rates

2. Which of the following is an appropriate monetary policy to combat anegative GDP gap?

   	a.	raise real interest rates
   	b.	lower real interest rates
   	c.	increase government spending
   	d.	raise income tax rates

3. Our macroeconomic model suggests that after a decline in aggregate demand like that of 2007, the economy will self correct and return to a position where the GDP gap is zero. If this is correct, why should the government ever intervene with fiscal policy?

   	a.	Fiscal policy is profitable for banks.
   	b.	This is part of the government's "mission statement" as given in the Constitution.
   	c.	It take many years  for the GDP gap to close on its own.
   	d.	People do not trust the theory behind the model.

4. Crowding out occurs when

   	a.	banks refuse to make loans to bad credit borrowers
   	b.	business profits are extremely high
   	c.	government and private individuals compete for loanable funds.
   	d.	government prints money

5. The text book describes various types of lags that may slow the response of Congress when the economy enters a recession. Which of the following describes the time required for Congress to recgonize that the economy is experiencing a recession?

   		Presidential lag
   		Implementation lag
   		Legislative lag
   		Recognition lag

Answer 1

Which of the following is an appropriate fiscal policy response to a negative GDP gap: (C) Increase in government Spending. (Expansionary Fiscal policy to increase output).

Which of the following is an appropriate monetary policy to combat anegative GDP gap: (B) Lower Real Interest Rates (expansionary monetary policy, increases money supply, which raises aggregate demand and output).

Our macroeconomic model suggests that after a decline in aggregate demand like that of 2007, the economy will self correct and return to a position where the GDP gap is zero. If this is correct, why should the government ever intervene with fiscal policy. : (C) It takes many years for the GDP gap to close on its own.

Crowding out occurs when: (C) Government and private individuals compete for loanable funds. This happens when government runs a budget deficit and to cover deficit it borrows money. So, the demand for loanable fund rises in the economy. It raises the interest rate which increases the cost of borrowings and decreases investment level.

The text book describes various types of lags that may slow the response of Congress when the economy enters a recession. Which of the following describes the time required for Congress to recgonize that the economy is experiencing a recession: It is called as Recognition Lag.