Question

7* For each of these statements identify if they are true or false and explain why.

a. The increase in revenue taxation received by the government during an economic boom is due to discretionary fiscal policy.

b.The legislative process which is required to implement fiscal policy often makes it easier to use than monetary policy.

c. A law requiring the government to balance its budget in each year would work against ‘automatic stabilizers’.

d.The government ‘purchases multiplier’ always has a positive sign and the ‘tax multiplier’ always has a negative sign

Answer 1

a) False. It occurs due to automatic stabilizers. This is because income automatically increases during expansion so tax revenue also increases without any additional discretion by the government

b) False. The legislative process of fiscal policy is more complex because the Congress has to approve the fiscal policy decision which takes days or even months, Monetary policy decisions taken by FOMC are much quicker to be implemented

c) True. If tax collections are reduced during recessions, government will deliberately reduce its spending so that it will cut expenses on unemployment benefits also, despite the fact that as automatic stabilizers, they should be higher during recessions

d) True. Government spending multiplier is 1/MPC and tax multiplier is -MPC/MPS.