1)An example of an automatic stabilizer is
A. a temporary tax rebate.
B. the progressive income tax.
C. cost of living adjustments to social security payments.
2)Which of the following represent expansionary fiscal policy?
A. an increase in average individual income tax rates
B. an increase in marginal individual income tax rates
C. a cut in corporate income tax rates
3)The amount of time that it takes to identify a national economic problem is
A. the recognition time lag.
B. the effect time lag.
C. the action time lag.
4)Contractionary fiscal policy usually will
A. generate greater real GDP.
B. generate lower price levels.
C. involve cutting taxes.
1) The correct answer is C. cost of living adjustments to social security payments.
To determine this, we need to understand what an automatic stabilizer is. Automatic stabilizers are government policies or programs that help offset fluctuations in the economy without any specific action by policymakers. They automatically adjust to changes in economic conditions, helping to stabilize the economy.
In this case, cost of living adjustments to social security payments are an example of an automatic stabilizer. Social security payments are generally adjusted annually to keep up with changes in the cost of living. When the economy is doing well and inflation is high, social security payments are increased to help individuals maintain their purchasing power. This helps to stimulate economic activity during periods of economic downturn.
2) The correct answer is C. a cut in corporate income tax rates.
Expansionary fiscal policy refers to government actions designed to stimulate economic activity and boost aggregate demand. This can be achieved through various means, including:
A. Lowering individual income tax rates would generally leave individuals with more disposable income. However, an increase in average individual income tax rates would have the opposite effect, reducing individuals' disposable income and potentially dampening consumer spending.
B. Increasing marginal individual income tax rates would have a similar effect to the above case. It would discourage work and investment, reducing overall economic activity.
C. Cutting corporate income tax rates, on the other hand, would leave businesses with more funds to invest, expand, and hire. This stimulates economic growth and job creation, making it an expansionary fiscal policy.
3) The correct answer is A. the recognition time lag.
In economics, there are different lags associated with the implementation of economic policies. The recognition time lag refers to the time it takes for policymakers to identify the existence of a national economic problem accurately.
Identifying economic problems requires collecting and analyzing relevant data, which takes time. It involves monitoring key economic indicators such as GDP, unemployment rates, inflation, and other relevant factors. Once the problem is recognized, policymakers can then take appropriate action to address it.
4) The correct answer is B. generate lower price levels.
Contractionary fiscal policy refers to government actions aimed at reducing aggregate demand to combat inflationary pressures in the economy. It typically involves measures such as reducing government spending or increasing taxes.
Lowering aggregate demand would result in lower inflationary pressures, leading to lower price levels. This is because the reduction in government spending or increase in taxes reduces consumers' disposable income, which in turn reduces their ability to spend on goods and services. As a result, businesses lower prices to stimulate demand.
It's important to note that contractionary fiscal policy may temporarily reduce real GDP in the short term, as it aims to adjust for inflationary pressures.