Briefly describe the potential negative effects of increasing government purchases rather than decreasing taxes during a recession.
What will be an ideal response?
Increasing government purchases during a recession can lead to a whole host of problems. People may realize that someone is going to have to pay for all of this spending sooner or later. If consumers anticipate higher taxes in the future to pay for the spending now, they may reduce current consumption and save for the higher taxes later. Perhaps more importantly, large government spending projects require careful planning. So making decisions without carefully weighing the benefits and costs of proposed projects may be wasteful. But in the midst of a recession, you want immediate stimulus. Consequently, the chances of making a mistake are greater and you may end up with projects that have little value, such as bridges that lead to nowhere. But if you wait too long, you might not get the stimulus you want. Reducing taxes also has the advantage of giving consumers the power to spend their disposable income on the goods and services they want, unlike political goods (sports stadiums, museums, schools, and so on) where it may not reflect individuals’ preferences. Likewise, firms spend their investment dollars on projects they think will be profitable.
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The principle of diminishing marginal utility can be used to explain why
A) Bob's second soda is less enjoyable than his first soda. B) Bob's first soda is less enjoyable than his second soda. C) Charlie enjoys his fourth soda less than Bob enjoys his first. D) Bob enjoys his first soda more than Charlie enjoys his fourth.
Refer to Figure 15-1. In the figure, the money demand curve would move from Money demand1 to Money demand2 if
A) the price level decreased. B) the interest rate increased. C) the Federal Reserve sold Treasury securities. D) real GDP increased.
The 2009 fiscal stimulus bill represented approximately
a. 5.5% of GDP and was designed to close the expansionary gap. b. 5.5% of GDP and was designed to close the recessionary gap. c. 7.8% of GDP and was designed to close the expansionary gap. d. 7.8% of GDP and was designed to close the recessionary gap.
If domestic savings is less than domestic investment, then
A) reserve assets will increase. B) the government runs a budget deficit. C) there will be negative foreign investment. D) a trade surplus must result.