1. To decrease aggregate demand, a government can either decrease spending or ____ taxes.

2. Contractionary fiscal policy shifts the aggregate demand curve to the ____, ____ prices, and ____ real GDP.

3. If the multiplier for taxation is 1.10, then a $110 billion increase in taxes will ultimately shift the demand curve by ____.

4. ____ lags refer to the time it takes for policymakers to recognize an economic problem and take appropriate actions.

5. A Chinese Experiment. In 2000 the Chinese government mandated three one-week holidays throughout the year to stimulate consumer spending. The idea was that these extended vacations would induce the Chinese to spend more of their earnings while on vacation.

a. Using the AD AS framework, show the mechanism through which the Chinese government believed that the mandated holidays would stimulate the economy.

b. Although consumption spending rose during the vacation period, the data show that consumption fell before and after the vacation. Did the policy work?

6. Time-Dated Certificates as Fiscal Policies. When Japan faced a decade-long recession in the 1990s, many ideas were offered to combat the recession. Here is one unusual fiscal policy: The government would issue time-dated certificates to each person that had to be spent on goods and services within a fixed period (say, three months) or become worthless. Suppose the government was considering whether to issue $400 in time-dated certificates to each household or give each household $400 in cash instead.

a. Which plan would lead to the greatest economic stimulus?

b. Which plan do you think the government would find easier to administer?

c. Suppose a household had large credit card debt, which it wished to reduce. Which of the two plans would that household prefer?

7. Political Systems and the Inside Lag for Fiscal Policy. Under a parliamentary system like in Britain, there are fewer checks and balances on the government than in the United States. In a parliamentary system, the party that controls the legislature also runs the executive branch. How do you think the inside lag for fiscal policy in England compares to that in the United States?

8. Looking Backward. Some critics of stabilization policy say that policymakers are always looking backward through a rear view mirror at past data and thus cannot conduct stabilization policy. Can you give a defense for policymakers despite the fact that they must look at past data? 9. Airplane Wings and Forecasting. When an airplane wing falls off, a pilot cannot use his normal controls to navigate the plane. How does this analogy apply to economic policy making?