The chairman of the House Ways and Means committee, who has major sway on spending programs, has been researching the economy and believes that the nation is heading for an inflationary spiral. Inflation iscurrently not considered a problem. He proposes a fiscal policy solution. Which of the following would not impede his proposition from alleviating the problem?
Answer(s): B
I, II, IV, and V are classic problems with fiscal policy. III is incorrect because in terms of fiscal policy tax or spending measures are interchangeable.
An economy is currently in equilibrium at full employment. If there is an unanticipated decrease in demand, the employment rate in the short run:
Answer(s): D
If there is an unanticipated decrease in demand, the demand curve will move to the left. The supply curve will not move in the short run since the demand cut-back is unanticipated. This will lead to a decrease in the employment rate and a fall in real GDP. Prices will also fall as a result of decreased demand.
Seeing that the unemployment rate is reaching new highs each month, several Senators group together to propose major tax cuts and spending increases to stimulate the economy. Both the increased spending and tax cuts will be implemented in the following January, more than six months away. Due to major public outcry, these bills pass through legislature very quickly. During the six months in between passage and implementation, the unemployment rate begins to fall. Another year passes, now 18 months after the bill was first passed, and the economy is suffering from significant inflation. What problem(s) with fiscal policy does this illustrate?
Answer(s): E
In this case, tax cuts and spending increases took approximately six months to enact. However, illustrating the recognition lag, by the time six months had passed, the economy was recovering. One year later, the economy is suffering from inflation. This is due to the fact that fiscal policy takes time to have its full impact, or impact lag.By the time the full impact was realized, the economy had recovered, and the fiscal stimulus caused inflation.
Since World War II the labor force participation rate (LPR)
Since 1948 the labor force participation rate for women has steadily increased while the rate for men has been declining. This suggests that the composition of work force participation within the family has changed substantially during the last five decades.
To the extent that people eventually adjust to demand stimulus policies, persistent expansionary macropolicy will lead to
Answer(s): C
Correctly anticipated inflation will result in persistent, though consistent, inflation with no effect on unemployment since there will be no effect on the real wage.
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