Chapter 12  Study Questions -
Fiscal Policy

                         INSTRUCTIONAL OBJECTIVES

                             After completing this chapter, students should be able to:

                           1.Identify the Employment Act of 1946 and the roles of the CEA and JEC.
                           2.Distinguish between discretionary and nondiscretionary fiscal policy.
                           3.Differentiate between expansionary and contractionary fiscal policy.
                           4.Recognize the conditions for recommending an expansionary or
                              contractionary fiscal policy.
                           5.Explain expansionary fiscal policy and its effects on the economy.
                           6.Explain contractionary fiscal policy and its effects on the economy.
                           7.Predict the effect on the Federal budget of an expansionary or
                              contractionary fiscal policy.
                           8.Describe the two ways to finance a government budget deficit and how each
                              affects the economy.
                           9.Describe the two ways to handle a government budget surplus and how
                              each affects the economy.
                          10.Give two examples of how built-in stabilizers help eliminate recession or
                          11.Explain the differential impacts of progressive, proportional, and regressive
                              taxes in terms of stabilization policy.
                          12.Explain the significance of the "full-employment budget" concept.
                          13.Compare the U.S. budget deficit problem to that in other countries.
                          14.List three timing problems encountered with fiscal policy.
                          15.State four political problems that limit effective fiscal policy.
                          16.Explain and recognize graphically how crowding out and inflation can reduce
                              the effectiveness of fiscal policy.
                          17.Explain how the Ricardian equivalence theorem predicts saving will offset an
                              expansionary policy.
                          18.Give two examples of complications that may arise when fiscal policy
                              interacts with international trade.
                          19.Give an example of supply-side fiscal policy and three possible positive
                              effects from it.


1. What is the Employment Act of 1946 and why is it important?

2. What is the CEA and the JEC and what are their roles?


3. What is discretionary fiscal policy and what alternatives are available
     when the economy is experiencing an recession?

4. Draw a diagram similar to fig 12-1 and explain the impact of a $5
    billion increase in government spending designed to push the economy
    out of a recession.

5. Why is a $6.67 billion reduction in taxes the same as a $5 billion
    increase in government spending.

6. Explain  why an $1.25 billion dollar increase in government spend and
    a $5 billion tax cut produce a $5 billion increase in spending ($20 billion
    dollar increase in GDP)

7. What fiscal policy alternative are available to  reduce demand-pull

8. Draw a diagram similar to fig 12-2 and explain how a reduction in
    government spending reduces the price level.

9. Explain why money creation in more expansionary than borrowing.

10. Explain why impounding a budget surplus is more anti-recessionary
      than the use of the surplus to retire public debt.

11. How do liberal and conservative economists differ with regard to
      using G and T to eliminate recession and inflation?  What is your


12. What are the major built-in stabilizers and how do they work to
      increase spending as an economy slides into recession?

13. Draw a figure similar to fig 12-3.
      a. Explain why taxes reduce GDP above GDP2.
      b. Draw a new line T2 through the point where G=T which is more
          progressive and explain why taxes tend to reduce spending even
          more above GDP2.

14. Draw a figure similar to fig 12-4 and explain why the difference between
      T and G lines  do not measure the governments fiscal policy.

15.  How is the full-employment (or structural) budget determined and
       why is it a better measure of the deficit than the actual budget?

16. What are the three way to require the Federal government to
      balance it's budget. What is wrong with all three.


17. What three timing problems make it difficult for government to
       react to recessionary or inflationary pressures.

18. What four basic political problems complicate carrying out stabilizing
      the economy.

19. Describe the crowding out effect and its impact on expansionary fiscal

20 According to supply side economists what are the supply-side effects
     of tax cuts? Why are mainstream economists skeptical of supply-side

21. Review the chapter Key questions and answers on the Internet.

22. Take the author's self test for chapter 12.
          The test is accessible from the EC211 page of the course page at
   ( Lower case required)

23. Optional. Take Dr. Perry homework test from chapter 12.
          The test is accessible from the EC211 page of the course page at
     (Lower case required)