The Ideal Quiz On Economy Ch 12 Review

Explanation
The Council of Economic Advisers was not established to give economic advice to Congress. Rather, it was created to provide economic advice and analysis to the President of the United States. The Council helps the President formulate and implement economic policy, and it also prepares the annual Economic Report of the President.

Explanation
This statement is false. Discretionary fiscal policy refers to the deliberate changes in government spending and taxation by the central government. It is not independent of Congress, as Congress has the authority to make decisions regarding fiscal policy. State and local governments do not have the discretion to implement discretionary fiscal policy on their own.

Explanation
During a recession or depression, expansionary fiscal policy aims to stimulate the economy by increasing government spending and/or reducing taxes. This injection of funds into the economy helps to boost consumer and business spending, which in turn increases aggregate demand and promotes economic growth. However, this increased government spending or reduced tax revenue leads to a budget deficit or adds to an existing deficit. Therefore, the statement that expansionary fiscal policy during a recession or depression will create a budget deficit or add to an existing deficit is true.

Explanation
The statement is true because when the government reduces taxes, it puts more money into the hands of households. However, not all of this additional money will be immediately spent. Some of it will be saved by households, which means that the increase in consumption will be less than the amount of the tax cut. Therefore, in order to increase the initial consumption by a specific amount, the government must reduce taxes by more than that amount.

Explanation
A reduction in taxes and an increase in government spending would actually be characteristic of an expansionary fiscal policy, not a contractionary one. In an expansionary fiscal policy, the government aims to stimulate economic growth by increasing spending and reducing taxes, which puts more money in the hands of consumers and businesses. This increased spending and lower tax burden can help boost aggregate demand and stimulate economic activity. On the other hand, a contractionary fiscal policy involves reducing government spending and increasing taxes to slow down economic growth and control inflation.

Explanation
A budget surplus is not financed by borrowing from the public. In fact, a budget surplus occurs when the government's revenues exceed its expenditures, resulting in excess funds. This surplus can be used to pay off debt, invest in infrastructure, or be saved for future use. Borrowing from the public is typically done to finance a budget deficit, when expenditures exceed revenues. Therefore, the given statement is false.

Explanation
When the government creates new money to finance deficit spending, it injects additional funds into the economy. This increase in the money supply can stimulate economic activity and lead to expansionary effects such as increased consumer spending and investment. On the other hand, borrowing from the public involves the government borrowing funds from individuals or institutions, which may have a crowding-out effect on private investment and reduce the overall level of economic activity. Therefore, the creation of new money is considered more expansionary than borrowing from the public to finance deficit spending.

Explanation
Using a budget surplus to pay off a large public debt can reduce the anti-inflationary impact of the surplus because it decreases the amount of money in circulation. When the government pays off its debt, it withdraws money from the economy, leading to a decrease in the money supply. This reduction in the money supply can help to mitigate inflationary pressures and stabilize prices. Therefore, the statement is true.

Explanation
The statement is false because the impounding of a budget surplus does not necessarily mean that it is used for tax cuts. The impounding of a budget surplus refers to the act of withholding or setting aside the surplus funds for future use or allocation to specific purposes, which may or may not include tax cuts. It depends on the government's fiscal policies and priorities on how they choose to utilize the surplus funds.

Explanation
Built-in stabilizers are economic policies or mechanisms that automatically adjust to counteract fluctuations in the economy. While they may not be strong enough to completely prevent recession or inflation, they can help mitigate their severity. This means that although built-in stabilizers cannot entirely eliminate economic downturns or inflationary pressures, they can play a role in minimizing their impact on the overall economy. Therefore, the statement that built-in stabilizers are not sufficiently strong to prevent recession or inflation, but they can reduce the severity is true.

Explanation
The full-employment budget does not indicate how much the government must spend and tax in order to achieve full employment in the economy. It is a theoretical concept that represents the level of government spending and taxation that would exist if the economy were operating at full employment. It serves as a benchmark for evaluating the fiscal stance of the government, but it does not provide a direct prescription for achieving full employment. Therefore, the statement is false.

Explanation
The statement is true because the full-employment budget refers to the government's budget when the economy is operating at its full potential, with low unemployment and maximum output. By observing the change in the full-employment budget, policymakers can determine the impact of discretionary fiscal policy on the economy. This allows them to assess whether the policy is expansionary or contractionary and whether it is effective in achieving its desired goals.

Explanation
Recognition, administrative, and operational lags in the timing of Federal fiscal policy refer to the delays in identifying and implementing appropriate fiscal measures to address economic issues. These lags can hinder the effectiveness of fiscal policies in reducing inflation and unemployment rates. Therefore, the statement that fiscal policies are more effective in reducing inflation and decreasing unemployment is false.

Explanation
The statement suggests that state and local governments' fiscal policies align with and support the Federal government's efforts to counter recession and unemployment. However, the correct answer is False, indicating that state and local governments' fiscal policies do not necessarily assist or reinforce the Federal government's efforts. State and local governments may have their own independent fiscal policies that may or may not align with the Federal government's goals and strategies.

Explanation
The given statement suggests that economists believe members of Congress engage in a political business cycle, where they increase taxes and reduce expenditures before elections and decrease taxes and increase expenditures after elections. However, the correct answer is false. This means that economists do not see evidence of a political business cycle.

Explanation
The statement is true because state and local governments often adjust their fiscal policies in response to economic conditions. During economic expansions, these governments tend to increase spending and decrease taxes, which can exacerbate the boom. Conversely, during economic downturns, they tend to cut spending and raise taxes, which can further depress the economy. This procyclical behavior can amplify the fluctuations of the business cycle and make the overall economy more volatile.

Explanation
The crowding-out effect actually occurs when an expansionary fiscal policy increases government spending, which leads to an increase in interest rates. This increase in interest rates then reduces private investment spending, thereby weakening fiscal policy. Therefore, the statement is incorrect.

Explanation
The crowding-out effect refers to the reduction in private sector spending that occurs when the government increases its own spending. This reduction in private sector spending can lead to a decrease in overall economic activity. Critics argue that the crowding-out effect is greatest when the economy is in a recession because there is already a decrease in private sector spending, and an increase in government spending can further exacerbate the crowding-out effect. However, the correct answer is false, suggesting that the crowding-out effect is not necessarily greatest during a recession.

Explanation
When the aggregate supply (AS) curve is upward sloping, it means that as the price level increases, businesses are willing to produce more goods and services. In this scenario, if there is an expansionary fiscal policy (such as increased government spending or tax cuts), it can lead to an increase in aggregate demand (AD) and potentially increase real GDP. However, due to the upward sloping AS curve, this increase in AD may also lead to an increase in the price level. As a result, some portion of the potential effect of the expansionary fiscal policy on real GDP may be lost because the increase in the price level reduces the purchasing power of consumers and businesses.

Explanation
Specialization and trade allow domestic economies to focus on their comparative advantages and produce goods and services more efficiently. This leads to increased productivity, economic growth, and higher standards of living. However, interdependency with the world economy can also bring complications such as vulnerability to global economic shocks, trade imbalances, and potential loss of domestic industries. Therefore, the statement that there are gains for specialization and trade but also complications from the interdependency with the world economy is true.

Explanation
An expansionary fiscal policy involves increased government spending and/or tax cuts to stimulate economic growth. However, if the country has a trade deficit, meaning it imports more than it exports, an expansionary fiscal policy may lead to increased imports, which can offset the positive effects of the policy. This is known as the net export effect, where the increase in imports reduces the overall impact of the expansionary fiscal policy on the economy. Therefore, the statement that a net export effect may partially offset an expansionary fiscal policy is true.

Explanation
Supply-side economists actually argue the opposite - they believe that reductions in tax rates increase aggregate supply (AS) by incentivizing individuals and businesses to work and invest more. According to their theory, this increase in AS leads to economic growth and can actually help to combat inflation. Therefore, the statement that reductions in tax rates decrease AS and are inflationary is incorrect.