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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
- When taxes are increased, this causes NNP to
- increase,
- remain same,
- decrease,
- no effect at all.
- A budget deficit occurs when
- True or False: Large budget deficits in recent years have contributed to reduce our trade deficit.
- true,
- false,
- no valid answer.
- The balanced budget multiplier is approximately
- less than 1,
- 1,
- 2,
- more than 2.
- A contractionary fiscal policy consists of
- decrease in G,
- increase in G,
- decrease in T,
- increase in G and decrease in T,
- decrease in G and increase in T.
- 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)
- political cycle,
- automatic stabilizer,
- expansionary bias,
- fiscal drag.
- Which of the following is NOT one of the lags creating timing problems for fiscal policy?
- Administrative,
- operational,
- recognition,
- competitive.
- True or False: As a result of the crowding-out effect, expansionary fiscal policy is more potent.
- true,
- false,
- no categorical answer is possible.
- Imposing a lump sum tax will immediately reduce
- S,
- C,
- AD,
- all answers are correct.
- Deliberate changes in taxes and spending by government to stimulate the economy or slow down inflation, are said to be part of
- social policy,
- foreign aid policy,
- fiscal policy,
- monetary policy.
- 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
- authoritarian,
- nondiscretionary,
- socialistic,
- laissez faire.
- Crowding-out effect refers to
- government borrowing reducing private investment,
- economics students leaving an economics class,
- employees being forced out of work,
- government spending making investment unnecessary.
- A government surplus will be more effective to reduce inflation, if it is
- used to repay debt,
- left idle,
- spent,
- distributed to those who need it.
- 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.
- true,
- false,
- no valid answer.
- A serious concern with the large U.S. public debt is that it is held by
- corporations,
- rich individuals,
- banks,
- foreigners.
- True or False: A lump sum tax is a leakage.
- true,
- false,
- no valid answer.
- True or False: An expansionary fiscal policy is more potent if new money is created, rather than if borrowing is used.
- true,
- false,
- no valid answer.
- The budget philosophy of balancing the budget annually has been criticized as
- countercyclical,
- procyclical,
- inflationary,
- creating large debt.
- True or False: Because public debt can be refinanced or paid off by printing money, the federal government cannot go bankrupt.
- true,
- false,
- no valid answer.
- A surplus created by nondiscretionary fiscal policy which acts to slow down growth when growth is needed, is referred to as
- crowding-out effect,
- operational lag,
- fiscal drag,
- complex multiplier.
Assignments
- 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.
- Show graphically and explain how an increase in a (lump sum) tax affects NNP equilibrium level. Use both, aggregate expenditure and leakage-injection graphs.
- 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.
- In Keynesian view, what should be the fiscal policy over a business cycle? What elements increase and decrease its effectiveness?
- 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?
- Discuss the problems and limitations of fical policy.
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