The government currently has no debt. To alleviate an economic slow down, Congress proposes an increase in spending partially offset by an increase in the highest marginal tax rate. This will force the Treasury to issue new debt. According to which of the following economic theories would this stimulate the economy?
Answer(s): B
Anytime the government runs a deficit, it can be considered a fiscal stimulus. However, since marginal tax rates were increased, the supply-side effect would be negative. The crowding out effect suggests that government borrowing will increase interest rates and partially offset the stimulate effects of the new spending.
If the quality of education in the U.S. improved, the direct effect would be a(n)
Answer(s): C
Increases in education, training and skill-enhancing experience can improve the quality of the labor force and thereby expand the supply of human resources, This could cause the cost of resources to decline (permanently) and expand both short run output and long run sustainable output.
The crowding-out effect refers to the possibility that an
Answer(s): D
The crowding out theory implies that government borrowing drives up real interest rates and thus crowds out" private investment. Private investment falls under higher interest rates because the cost of investment (the real interest rate) rises if the government borrows heavily. Under the usual law of supply and demand, the government causes the interest rate to rise under deficit spending because there is a limited supply of loanable funds. The government competes with the private sector for these resources and thus drives up the price (i.e., the interest rate).
An acceleration in the growth rate of the money supply is known as ________.
Answer(s): A
The Fed generally pumps additional money into the economy via open market operations - the purchase of bonds in the open market. The consequence of this action is usually a rise in the real interest rate. The Fed can also implement expansionary monetary policy through manipulation of the discount rate. A higher discount rate will serve to contract the money supply; a lower rate will expand the money supply.
Which of the following would be counted in the calculation of GDP?
GDP is the total market value of all final goods and services produced domestically during a specific period.Non market activities are not counted; the sale of used goods are also not counted. A broker's fee is counted because it represents a service that was produced domestically.
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