Question : 18.5   The Limits of Using Fiscal Policy to Stabilize the : 1244882

18.5   The Limits of Using Fiscal Policy to Stabilize the Economy

1) The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because

A) the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy.

B) the Federal Reserve can immediately recognize when real GDP is below or above potential GDP.

C) changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes.

D) changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time.

2) The use of fiscal policy to stabilize the economy is limited because

A) changes in government spending and tax rates have a small effect on aggregate demand.

B) changes in government spending and tax rates have a small effect on interest rates.

C) the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way.

D) the Internal Revenue Service (IRS) resists changes in tax rates because of all the changes they would have to make to the tax code.

3) Crowding out refers to a decline in ________ as a result of an increase in ________.

A) tax revenues; unemployment

B) government purchases; tax rates

C) government purchases; private expenditures

D) private expenditures; government purchases

4) The crowding out of private spending by government spending will be greater the

A) less sensitive consumption, investment, and net exports are to changes in interest rates.

B) more sensitive consumption, investment, and net exports are to changes in interest rates.

C) less sensitive consumption, investment, and net exports are to changes in the price level.

D) more sensitive consumption, investment, and net exports are to changes in the price level.

5) An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate ________ the government purchases multiplier.

A) will decrease

B) will increase

C) will not change

D) may increase or may decrease

6) The impact of crowding out may be the least

A) during a deep recession.

B) when real GDP is above but close to potential GDP.

C) during an expansion.

D) when real GDP is below but close to potential GDP.

7) In the long run, most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending.

A) no

B) partial

C) complete

D) more than complete

8) Expansionary fiscal policy

A) can be effective in the short run.

B) causes complete crowding out in the short run.

C) is never effective because of crowding out.

D) can be effective in the long run.

9) In the long run, most economists agree that a permanent increase in government spending leads to

A) no decrease in private spending.

B) a decrease in private spending by less than the amount that government spending increased.

C) a decrease in private spending by the same amount that government spending increased.

D) a decrease in private spending by more than the amount that government spending increased.

10) In early 2008, the housing crisis and rising oil prices increased the risk of recession in the United States. What fiscal policy action was taken by Congress and the president to counter these events?

A) The Federal Reserve cut its target for the federal funds rate.

B) There was an increase in government spending on defense and unemployment compensation.

C) Taxpayers were given rebates on taxes they already paid.

D) Income taxes were raised to reduce the federal budget deficit and reduce interest rates.