Question : 131) Which of the following statements about fiscal policy the : 1384418

131) Which of the following statements about fiscal policy is the best example of “gross tuning”?

A) The government continuously alters its spending and taxing plans to hold real GDP at potential.

B) The government cuts taxes to remove a large and persistent recessionary gap.

C) The government increases its spending to reduce an inflationary gap.

D) The government decreases tax rates to decrease an inflationary gap.

E) The government uses automatic stabilizers to reduce any output gaps.

132) Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of

A) a decision lag.

B) fine tuning.

C) gross tuning.

D) automatic fiscal stabilizers.

E) an execution lag.

133) An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________.

A) rises to an unsustainable level; real GDP is reduced

B) is crowded out; corporate tax revenue is reduced

C) increases; aggregate demand increases

D) increases; net exports increases

E) is crowded out; potential output is reduced

134) Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long-run effects on potential output?

A) The growth rate of potential output may be reduced due to the crowding out of investment.

B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy.

C) Potential output will drop below its starting point because of the crowding out of investment.

D) The growth rate of potential output will rise due to the higher level of aggregate demand.

E) The level of potential output is fixed and will not be affected by fiscal policy.

135) In any decision about stimulating the economy with a fiscal expansion (increasing government purchases), the government must weigh the short-run benefits of ________ against the long-run costs of ________.

A) a higher price level; unemployment

B) increased potential output; a higher price level

C) a higher price level; lower real GDP

D) increased real GDP; higher economic growth

E) increased economic activity; lower economic growth

136) Suppose that the government announces temporary tax cuts to stimulate consumers’ consumption expenditures but the impact of this tax change on consumption is observed to be very small. This outcome might be explained by the fact that

A) this economy is already at its long-run equilibrium.

B) this economy is suffering from the paradox of thrift.

C) the impact of the policy is dampened by the automatic fiscal stabilizers.

D) the government has little credibility.

E) the consumers anticipate that the tax change is only temporary and thus is unlikely to affect their “lifetime” income.

137) The ________ associated with fiscal policy make(s)________ tuning difficult to implement successfully.

A) execution lag; gross

B) execution lag; fine

C) decision lag; gross

D) decision lag; fine

E) execution and decision lags; fine

138) The growth rate of potential output might be decreased by an expansionary fiscal policy if

A) the budget deficits are persistent.

B) the simple multiplier is small.

C) the policy crowds out private investment.

D) public investment has high productivity.

E) the composition of output is not altered.

139) A reduction in the net tax rate might lead to an increase in the growth rate of potential output if

A) the simple multiplier is large.

B) the tax cuts stimulate private investment.

C) firms are operating at their normal capacity.

D) households are not forward looking.

E) the marginal propensity to consume is large.

140) The use of government purchases (G) as a fiscal policy tool can have an effect on long-run growth in the economy. Under what circumstances might an increase in G cause the level of potential output () to increase?

A) If the increase in G crowds out private investment.

B) If the increase in G causes a permanent increase in the marginal propensity to consume, which causes a permanent rightward shift of the AD curve.

C) If the increase in G is spent on public infrastructure that increases the productivity of private-sector production.

D) If the increase in G leads to a permanent increase in the level of autonomous saving in the economy.

E) If the increase in G is offset by an equal decrease in C, I, and NX.