Question

Which of the following statements is correct regarding automatic stabilizers?

Select one:

a. They indicate that tax collections, subsidies, and transfer payments vary inversely with the level of GDP.

b. When GDP increases, tax collections automatically decrease and subsidies and transfer payments automatically increase.

c. When GDP decreases, tax collections automatically decrease and subsidies and transfer payments automatically increase.

d. They indicate that the size of the multiplier varies inversely with the level of GDP.

If the government faces inflation, appropriate monetary policy would have to include:

Select one:

a. sell Federal Treasury bonds, increase the reserve requirement, increase the discount rate, increase the interest paid on deposits placed with the Federal Reserve.

b. sell Federal Treasury bonds, decrease the reserve requirement, decrease the discount rate and decrease the interest paid on deposits placed with the Federal Reserve.

c. purchase Federal Treasury bonds, reduce the reserve requirement, decrease the discount rate and reduce the interest paid on deposits placed with the Federal Reserve.

d. buy Federal Treasury bonds, increase the reserve requirement, increase the discount rate and increase the interest paid on deposits placed with the Federal Reserve.

The foreclosure effect caused by an expansive fiscal policy suggests that:

Select one:

a. consumption and investment remain unchanged.

b. increases in government spending that are financed through loans will increase interest rates, which will reduce the country's investments.

c. aggregate demand will increase due to the multiplier effect.

d. the investment has no effect on the growth of the Gross Domestic Product.

Answer 1

1. Automatic stabilizers like taxes, subsidies and transfer payments mitigate effect of inflation and recession. During recession when GDP decrease and the people have to pay less tax or someone will be exempted from tax payment. Thus the increased disposable income increase demand and price level. Again during times of recession the transfer payments and subsidies increase. The increase in subsidies and transfer payments reduce the intensity of recession.

c. When GDP decreases, tax collections automatically decrease and subsidies and transfer payments automatically increase.

2. During inflation the money supply must be reduced. Thus the appropriate monetary policy include sale of Federal Treasury bonds, increase the reserve requirements, increase the discount rate, increase the interest paid on deposit placed with the Federal Reserve.

a. sale of Federal Treasury bonds, increase the reserve requirements, increase the discount rate, increase the interest paid on deposit placed with the Federal Reserve.

3. The foreclosure effect suggests that the increased public expenditure financed by borrowing will increase the rate of interest and reduce the private investment.

b. increases in government spending that are financed through loans will increase interest rates.