Download Fiscal Policy Practice Part 1

Fiscal Policy Practice
Fiscal policy is only ever conducted by the _______________ and can only shift the ____ curve.
Fighting a Recession:
Fighting Inflation:
Policy Name =
Taxes =
Transfers =
Gov. Spending =
Budget Result =
Policy Name =
Taxes =
Transfers =
Gov. Spending =
Budget Result =
Aggregate Model:
C should =
G should =
AD should =
Aggregate Model:
C should =
G should =
AD should =
1. The country of Boldovia has no unemployment insurance benefits and a tax system that
uses only lump-sum taxes (a fixed amount paid by all taxpayers). The neighboring country of
Moldovia has generous unemployment benefits and a tax system in which residents must
pay a percentage of their income. Which country will experience greater variation in real
GDP in response to demand shocks, positive and negative? Explain.
2. In each of the following cases, determine whether policy is an expansionary or
contractionary fiscal policy:
a. Several military bases around the country, which together employ tens of thousands of
people, are closed.
b. The number of weeks an unemployed person is eligible for unemployment benefits is
increased.
c. The federal tax on gasoline is increased.
d. The government creates a stimulus package in efforts to stimulate real GDP growth.
e. The government cuts its spending financing updates to infrastructure in half in order to
balance the budget and eliminate debt.
3. The economy is currently experiencing a recessionary gap. List three fiscal policy options
that would move the economy closer to potential real GDP. Using a correctly labeled AD/AS
graph and then explain how your policy would achieve the desired result. Make sure to
explain what will happen to output and price level.
4. The economy is currently at a level of output that exceeds potential GDP (Yp). List two fiscal
policy options that would move the economy closer to potential real GDP. Show and explain
how your policy would achieve the desired result. Make sure to explain what will happen to
output and price level.
5. The current level of real GDP lies below potential GDP. An appropriate fiscal policy would be
to _____. Include an appropriate graph showing the initial condition and impact of the fiscal
policy action with your answer to the right.
A. increase the money supply.
B. decrease transfer payments.
C. increase tax rates.
D. increase government purchases
E. decrease government purchases.
Fiscal Policy Practice KEY
Fiscal policy is only ever conducted by the __Government (Congress & President) __ and can
only shift the __AD__ curve.
Fighting a Recession:
Fighting Inflation:
Policy Name = Expansionary
Taxes = ↓
Transfers = ↑
Gov. Spending = ↑
Budget Result = deficit
Policy Name = Contractionary
Taxes = ↑
Transfers = ↓
Gov. Spending = ↓
Budget Result = surplus
Aggregate Model:
C should = ↑
G should = ↑
AD should = ↑
Aggregate Model:
C should = ↓
G should = ↓
AD should = ↓
1. The country of Boldovia has no unemployment insurance benefits and a tax system that
uses only lump-sum taxes (a fixed amount paid by all taxpayers). The neighboring country of
Moldovia has generous unemployment benefits and a tax system in which residents must
pay a percentage of their income. Which country will experience greater variation in real
GDP in response to demand shocks, positive and negative? Explain.
Boldovia will experience greater variation in its real GDP than Moldovia because
Moldovia has automatic stabilizers while Boldovia does not. In Moldovia, the effects of
slumps will be lessened by unemployment insurance benefits, which will support
residents’ incomes, while the effects of booms will be diminished because tax revenues
will go up. In contrast, incomes will not be supported in Boldovia during slumps because
there is no unemployment insurance. In addition, because Boldovia has lump-sum taxes,
its booms will not be diminished by increases in tax revenue.
2. In each of the following cases, determine whether policy is an expansionary or
contractionary fiscal policy:
a. Several military bases around the country, which together employ tens of thousands of
people, are closed. Contractionary
b. The number of weeks an unemployed person is eligible for unemployment benefits is
increased. Exansionary
c. The federal tax on gasoline is increased. Contractionary
d. The government creates a stimulus package in efforts to stimulate real GDP growth.
Expansionary
e. The government cuts its spending financing updates to infrastructure in half in order to
balance the budget and eliminate debt. Contractionary
3. The economy is currently experiencing a recessionary gap. List three fiscal policy options
that would move the economy closer to potential real GDP. Using a correctly labeled AD/AS
graph and then explain how your policy would achieve the desired result. Make sure to
explain what will happen to output and price level.
4. The economy is currently at a level of output that exceeds potential GDP (Yp). List two fiscal
policy options that would move the economy closer to potential real GDP. Show and explain
how your policy would achieve the desired result. Make sure to explain what will happen to
output and price level.
5. The current level of real GDP lies below potential GDP. An appropriate fiscal policy would be
to _____. Include an appropriate graph showing the initial condition and impact of the fiscal
policy action with your answer to the right.
A. increase the money supply.
B. decrease transfer payments.
C. increase tax rates.
D. increase government purchases
E. decrease government purchases.