Exam 32: The Fiscal Policy Dilemma

Refer to the graph shown. Assume the economy is in short-run equilibrium at point A below potential output. The government opts for an expansionary fiscal policy in an attempt to pull the economy out of the recession. An economist with a Classical view holding the Ricardian equivalence theorem to be practically true would conclude that the economy will most likely end up at point:

Using fiscal policy to stabilize the economy is difficult because:

If interest rates adjust to equate savings and investment, then an expansionary fiscal policy is:

Crowding out will be less likely to occur if:

Crowding out:

Refer to the graph shown. Assume the economy is in short-run equilibrium at point A below potential output. The government opts for an expansionary fiscal policy that shifts the AD curve from AD₀ to AD₁ in an attempt to pull the economy out of the recession. An economist with a functional finance view, who also recognizes that there will be a certain degree of crowding out, would conclude that the economy will likely end up at point:

What is the difference between "sound finance" and "functional finance"? Why did the advocates of each view of public finance take such different positions?

Which of the following issues will economists likely agree about?

The concept of fiscal policy refers to the:

Because automatic stabilizers increase government spending and decrease tax revenue during a recession and have the opposite effect during a recovery, they tend to create budget:

Sound finance holds that government spending should be directed toward sound investment.

Automatic stabilizers are government programs or policies that will counteract the business cycle without any new government action.

Generally speaking, the government implements fiscal policy in a:

It is generally true that elected officials find it easier to:

Which of the following policies would reduce the procyclical nature of fiscal policy at the state level?

Financing expansionary fiscal policy by increasing the deficit does not generally affect interest rates.

In terms of fiscal policy, which of the following is an example of a fiscal automatic stabilizer?

A decrease in the budget deficit will have a:

What are three advantages and disadvantages of expansionary fiscal policy?

Empirical evidence over the past two decades suggests that the percentage of unemployed who receive unemployment insurance has been declining,and in 2017 only about 27% of unemployed persons collected benefits.What does this decline do to the impact of unemployment insurance as an automatic stabilizer?