How do expectations about the future by households and businesses affect the effectiveness of fiscal policy? Cite examples.
What will be an ideal response?
If households or businesses expect that the fiscal policy changes are only temporary, they may not change their behavior in the expected way. For example, if tax cuts are enacted to stimulate consumer spending, some consumers may not change their spending habits if they think the tax change is only temporary. In the future, they will have to pay more in taxes, so they might increase their saving. Similarly, businesses may not invest in new plants and equipment if they get a tax cut, if they expect taxes in the future to rise or the fiscal policy to be ineffective.
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Everything else held constant, an increase in net taxes ________ aggregate ________
A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply
Asymmetric information problems are less severe the __________ the borrowing firm, since there is __________ publicly available information about those firms
A) larger; more B) larger; less C) smaller; more D) smaller; less
We can tell how much physical capital has been added to the economy by:
A. counting the number of persons of working age. B. counting the number of persons of working age who are employed. C. adding up the value of all tools, equipment, and structures that have ever been built. D. taking into account both new investment and depreciation of capital.
A direct relationship exists when:
A. there is no association between two variables. B. one variable increases and there is no change in the other variable. C. one variable increases and the other variable increases. D. one variable increases and the other variable decreases.