Question 1

Which of the following are areas of general agreement among modern economists?

1. To stabilize the economy, fiscal policy should be used prior to monetary policy.
2. Expansionary fiscal policy increases aggregate demand.
3. Various types of lags make passive monetary policy undesirable as a tool for stabilizing the economy.
4. Fiscal and monetary policy can affect the unemployment rate in the short run

Question 2

Suppose the economy is experiencing a recessionary gap.

1. Draw a graph showing aggregate demand, short-run aggregate supply, and long-run aggregate supply. Label both axes, all curves, and the recessionary gap. Label the actual output level as Y1, the actual price level as PL1, and the full-employment output level as Yf.
2. Explain one specific supply-side fiscal policy that could eliminate the recessionary gap.
3. Show how the policy you explained in part b would change your graph if the policy were successful.

Question 3

Suppose the economy is experiencing a recessionary gap.

1. Draw a graph showing aggregate demand, short-run aggregate supply, and long-run aggregate supply. Label both axes, all curves, and the recessionary gap. Label the actual output level as Y1, the actual price level as PL1, and the full-employment output level as Yf.
2. Explain one specific expansionary fiscal policy that Keynesian economists might suggest to eliminate the recessionary gap.
3. Show how the policy you explained in part b would change your graph if the policy were successful.

Question 4

Suppose the economy develops an inflationary gap. Identify two automatic stabilizers that will help dampen the upswing in the economy.

Question 5

Which of the following events is most likely to cause or contribute to each of the problems listed below in the context of fiscal policy?

Events:

1. decline in interest rates
2. government borrowing
3. political squabbling
4. a decrease in saving
5. an increase in saving
6. defunding of data collection for the University of Michigan Index of Consumer Expectations

Problems:

___ crowding out

___ implementation lags

___ recognition lags

___ outside lags