What are the fiscal policy options to reduce an inflationary gap? Do these policies have the same impact?
What will be an ideal response?
The government can reduce its spending on goods and services, reduce transfer payments, or increase taxes to reduce an inflationary gap. A decrease in spending on goods and services has a more powerful impact than an equal tax increase or an equal transfer payments decrease because tax and transfer payments changes go to the household before they reach aggregate demand. There is a savings leakage of dollars that flow to the household from a tax decrease or transfer payments increase.
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The graph illustrates the market for British pounds, the currency of the United Kingdom. As the number of buyers of pounds increases and the number of sellers of pounds increases, the equilibrium price of a pound
A) will fall B) will rise. C) will remain the same. D) might rise, fall, or remain the same depending on whether the effect on buyers is larger than, less than, or the same as the effect on sellers. E) None of the above answers is correct.
The time it takes to overcome the practical and procedural hurdles before the Fed can begin to fix the economy is called the
A) recognition lag. B) implementation lag. C) impact lag. D) liquidity lag.
Crowding out refers to the situation in which:
a. borrowing by the federal government raises interest rates and causes firms to invest less. b. foreigners sell their bonds and purchase U.S. goods and services. c. borrowing by the federal government causes state and local governments to lower their taxes. d. increased federal taxes to balance the budget causes interest rates to increase and consumer credit decreases.
Inflation often bestows unearned income on
a. homeowners. b. lenders. c. creditors. d. fixed income receivers.