Business

discussion question 13-07 a. the problem of time lags in enacting and applying fiscal policy is multiple choice 1 discretionary fiscal policy only works in certain economic situations. for a policy to have its full effect on the economy, it must be enacted in three months; however, it usually takes longer. there are offsetting circumstances that can occur in the private market. in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed. b. a political business cycle is the idea that multiple choice 2 the economy usually contracts during election years because there is intense scrutiny on spending. politicians are more interested in adding spending programs than in getting elected. the economy usually expands during election years because there is extra spending. politicians are more interested in reelection than in stabilizing the economy. c. expectations of a near-term policy reversal weaken fiscal policy because multiple choice 3 people tend to make decisions based on pre-tax income. interest rates will usually rise, offsetting any change in fiscal policy. tax cuts are combined with spending increases so there is no real effect. consumers may hesitate to increase their spending because they believe that tax rates will rise again. d. the crowding-out effect is multiple choice 4 a reduction in investment spending caused by an increase in interest rates arising from an increase in government spending. an increase in investment spending caused by a decrease in interest rates arising from an increase in government spending. a reduction in investment spending caused by a decrease in interest rates arising from an increase in government spending. an increase in investment spending caused by an increase in interest rates arising from an increase in government spending.