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13 May, 2015 - 10:25

The Index of Leading Indicators is used to eliminate or shorten recognition lags. These indicators provide economists with a clue to where the economy is heading. None of the indicators alone can predict the future course of the economy. The eleven leading indicators are averaged or indexed to provide a comprehensive forecast of the economy. An Index of Leading Indicators which declines or increases three consecutive months or more is indicative that the economy is moving in a particular direction.

Review Quiz

  1. When taxes are increased, this causes NNP to
    1. increase,
    2. remain same,
    3. decrease,
    4. no effect at all.
  2. A budget deficit occurs when
  3. True or False: Large budget deficits in recent years have contributed to reduce our trade deficit.
    1. true,
    2. false,
    3. no valid answer.
  4. The balanced budget multiplier is approximately
    1. less than 1,
    2. 1,
    3. 2,
    4. more than 2.
  5. A contractionary fiscal policy consists of
    1. decrease in G,
    2. increase in G,
    3. decrease in T,
    4. increase in G and decrease in T,
    5. decrease in G and increase in T.
  6. The recurring deficits and surpluses over the business cycle, which are created by the nondiscretionary fiscal policy (resulting from transfer payments), are said to constitute a(n)
    1. political cycle,
    2. automatic stabilizer,
    3. expansionary bias,
    4. fiscal drag.
  7. Which of the following is NOT one of the lags creating timing problems for fiscal policy?
    1. Administrative,
    2. operational,
    3. recognition,
    4. competitive.
  8. True or False: As a result of the crowding-out effect, expansionary fiscal policy is more potent.
    1. true,
    2. false,
    3. no categorical answer is possible.
  9. Imposing a lump sum tax will immediately reduce
    1. S,
    2. C,
    3. AD,
    4. all answers are correct.
  10. Deliberate changes in taxes and spending by government to stimulate the economy or slow down inflation, are said to be part of
    1. social policy,
    2. foreign aid policy,
    3. fiscal policy,
    4. monetary policy.
  11. Government programs (such as welfare, medicare and medicaid), which are not specifically intended to stabilize the economy are said to be fiscal policy which is
    1. authoritarian,
    2. nondiscretionary,
    3. socialistic,
    4. laissez faire.
  12. Crowding-out effect refers to
    1. government borrowing reducing private investment,
    2. economics students leaving an economics class,
    3. employees being forced out of work,
    4. government spending making investment unnecessary.
  13. A government surplus will be more effective to reduce inflation, if it is
    1. used to repay debt,
    2. left idle,
    3. spent,
    4. distributed to those who need it.
  14. True or False: Keynes showed that if G and T are increased by the same amount, Y will increase also by exactly the same amount.
    1. true,
    2. false,
    3. no valid answer.
  15. A serious concern with the large U.S. public debt is that it is held by
    1. corporations,
    2. rich individuals,
    3. banks,
    4. foreigners.
  16. True or False: A lump sum tax is a leakage.
    1. true,
    2. false,
    3. no valid answer.
  17. True or False: An expansionary fiscal policy is more potent if new money is created, rather than if borrowing is used.
    1. true,
    2. false,
    3. no valid answer.
  18. The budget philosophy of balancing the budget annually has been criticized as
    1. countercyclical,
    2. procyclical,
    3. inflationary,
    4. creating large debt.
  19. True or False: Because public debt can be refinanced or paid off by printing money, the federal government cannot go bankrupt.
    1. true,
    2. false,
    3. no valid answer.
  20. A surplus created by nondiscretionary fiscal policy which acts to slow down growth when growth is needed, is referred to as
    1. crowding-out effect,
    2. operational lag,
    3. fiscal drag,
    4. complex multiplier.


  1. Show graphically and explain how an increase in government spending affects NNP equilibrium level. Use the aggregate expenditure graph as well as the leakage-injection graph.
  2. Show graphically and explain how an increase in a (lump sum) tax affects NNP equilibrium level. Use both, aggregate expenditure and leakage-injection graphs.
  3. What is the overall effect of a simultaneous increase in tax collection and government spending? Show this effect with the help of both aggregate expenditure and leakage-injection graphs.
  4. In Keynesian view, what should be the fiscal policy over a business cycle? What elements increase and decrease its effectiveness?
  5. What is the impact of various government programs which make up the bulk of government spending and are referred to as nondiscretionary? Why is a full-employment budget calculated and what is its purpose?
  6. Discuss the problems and limitations of fical policy.