5.3.7Quiz: Wrap-Up

The government debt has been steadily growing since 1980. By 1996, it had grown to:

$5 trillion.

Suppose equilibrium savings equals $750 billion, and equilibrium GDP equals $3,500 billion. Investment spending rises to $900 billion, and equilibrium level of real GDP increases by $500 billion. Assuming everything else remains constant, the value of the spending multiplier is:

3.3

Fiscal policy is rarely used today. This is because:

All of the above.

When the government borrows money, private borrowing decreases. This is called:

Crowding out.

The balanced budget multiplier refers to the:

Effect on GDP of equal changes in taxes and government spending.

Fiscal policy that increases real GDP is called:

Expansionary.

Assuming that the MPC = .75 and that prices are constant, which of the following fiscal policies would eliminate a recessionary gap of $60 billion while maintaining a balanced budget?

Increasing government spending by $60 billion while raising taxes $60 billion.

If the economy is near full employment, AD/AS analysis says expansionary fiscal policy will cause:

Inflation.

When the government runs a deficit, it must borrow money to cover its excess spending. The government borrows money by:

Issuing loans in the form of T-bonds.

Fiscal policy would still be used extensively today if there were not a good alternative. That alternative is:

Monetary policy.

An expansionary fiscal policy would be the one that:

Raises government spending and/or lowers taxes.

Suppose the current rate of inflation is about 14% and there is an inflationary gap of $150 billion in the economy. Which of the following policies would be most appropriate to reduce inflation if the marginal propensity to save (MPS) is equal to 0.05.

Reduce government spending by $7.5 billion

In AD/AS analysis, fiscal policy affects the economy through:

The AD curve.

Which of the following is not one of the criticisms of fiscal policy?

The effects of fiscal policy on aggregate demand are uncertain. (wrong!!)

The federal government notices the economy is heading into a recession, and determines to engage in expansionary fiscal policy. However, six months later, when the policy is enacted the economy is enjoying very low unemployment. What happens?

The expansionary policy causes an initial increase in AD, which leads to a decrease in AS.

If the government borrows funds, it "crowds out" private investment. This causes the interest rate (the price of investment) to increase. The interest rate increases because:

The government has increased the demand for funds.

A reduction in the tax rates may not stimulate the economy if:

The tax cut is temporary and does not change permanent disposable income.

If the economy is near the full-employment level of output, the AD/AS analysis of a change in government spending or taxation will be different from the Keynesian analysis.

True.

One justification for a personal income tax cut is to increase the labor supply. Given that this policy will increase aggregate demand and supply, there will be an inflationary pressure if:

aggregate demand grows more rapidly than aggregate supply

Prior to 1980, the federal government _________ ran a budget deficit.

sometimes