Download Fiscal Policy—Review

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Fiscal Policy—Review Questions
You may write your answers directly on this sheet.
1. What is the difference between automatic and discretionary fiscal policy?
2. What type of fiscal policy would you propose if the economy were in a
recessionary gap? Explain your answer.
3. Explain, using correctly labeled graphs, what crowding out is.
4. What is a legislative lag?
5. Fill in the blanks in the table:
If the objective is to
And the MPC is…
raise Real GDP by…
$400 b
$500 b
$100 b
If the objective is to
raise Real GDP by…
$400 b
$500 b
$100 b
Then autonomous
government spending
should be increased
by…
.80
.75
.60
And the MPC is…
Then taxes should be
cut by…
.80
.75
.60
What is the Question?
6. Changes in government expenditures and/or taxes that occur automatically
without (additional) congressional action.
7. Deficits do not necessarily bring higher interest rates.
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8. The time it takes before policy makers know of a change in the economy.
9.
Which of the following is an example of discretionary fiscal policy?
a. Congress raises taxes.
b. Congress lowers taxes.
c. Congress increase spending.
d. Congress decreases spending.
e. All of the above.
10. Unemployment compensation benefits is an example of
a. Expansionary discretionary fiscal policy.
b. Automatic fiscal policy.
c. Contractionary fiscal policy.
d. Discretionary fiscal policy.
e. B and D
11. Suppose that the income tax rate rises as taxable income rises. If taxable income rises in
the economy, the “higher tax rate at a higher taxable income” is an example of
a. Discretionary fiscal policy.
b. Automatic fiscal policy.
c. Expansionary discretionary fiscal policy.
d. Contractionary discretionary fiscal policy.
e. There is not enough information to answer the question.
12. Using Keynes’s ideas about propensity to save and consume, Real GDP will rise by $600
billion if the multiplier is ____ and the increase in autonomous spending equals _____
billion.
a. 2: $250
b. 1: $1,000
c. 3; $200
d. 2: $1,000
e. Not enough info to answer the questions
13. Again, using Keynes’ ideas, a rise in spending of _____ billion is consistent with a MPC
of _____ and desired rise in Real GDP of _____ billion.
a. $400; .90; $2,000
b. $200; .60; $2,000
c. $800; .80; $2.500
d. $230: .75 $7,500
e. none of the above
14. Again, using Keynes’ ideas, if Congress wants to raise real GDP by $500 billion, and the
MPC is .80, Congress should lower taxes by _____ billion.
a. $200
b. $50
c. $100
d. $125
e. none of the above