Fiscal Policy Quiz

Inflation is a sign that the aggregate demand curve is:

• being pushed to the left.
• somewhere within the vertical range.
• well within the horizontal range.
• just entering the positive-sloped range.

The Council of Economic Advisers was established by the Employment Act of 1946 to:

• set limits on taxation.
• help the president carry out the objectives of that Act.
• establish a balance between traditional economics and Keynesian economics.
• ensure a balanced budget.

Economist Ruth B. feels that too much reliance on government intervention through fiscal policy is hazardous to our nation’s future economic health. “We’ve seen the automatic stabilizers work in the past,” she contends. “Why not let things take their course? Government spending is high enough right now to keep the economy functioning well without so much steering on our part. It may well do better without us.” Which of the following probably BEST describes the way today’s economists would view Ruth’s argument in this scenario?

• It not only makes good sense, but is actually reflective of current fiscal policy.
• Ruth’s view is dangerously naive considering that the so-called economic stabilizers work well only with government intervention.
• It’s an approach that makes sense when things are generally functioning well, but economic stabilizers have limited impact.
• Ruth’s advocated approach makes sense under extreme circumstances, but not under normal economic conditions.

Which of the following BEST explains why automatic stabilizers have more effect on our economy now than they did during the 1930s?

• We have shifted from an agricultural economy to an industrial economy.
• We have learned more about controlling inflation and unemployment, so less adjustment is needed.
• As the classical economists predicted, inflation and unemployment are beginning to balance each other out.
• spending has increased dramatically since the 1930s.

When President Kennedy took office in 1961, he inherited an economy marked by high unemployment. His advisers, led by Walter W. Heller, pushed hard for a tax cut to deal with the problem. Ultimately, after much consideration and deliberation, Kennedy agreed to the strategy, and the tax cut of 1964 became a reality just months after Kennedy’s assassination. Which of the following BEST describes the impact of the 1964 tax cut, as today’s analysts see it?

• The impact was great, stimulating investment, greatly reducing unemployment, and dramatically increasing GNP.
• The impact was moderate, though sufficient to convince most economists that the decision was correct.
• The impact was very slight, disappointing to those who had favored a government spending package in place of the tax cut.
• The impact was negligible, so slight as to indicate that the decision was a poor one indeed.

Since 1929, government expenditures have grown faster than total output. Which of the following has contributed LEAST to this rapid growth in government spending?

• Increased defense spending.
• Increased public demand for government services.
• Growth in government transfer payments.
• Shifts in equilibrium NNP.