Ch. 33 Fiscal Policy, Deficits, and Debt
What may offset the crowding-out effect of deficit spending?
Improved prospects that firms might expect from a fiscal stimulus
Which of the following is a problem that may arise in connection with fiscal policy?
Recognition lag
Economists who support the idea that increased spending during recession and increased taxes in times of demand-pull inflation are necessary, usually are in favor of
a large government
The difference between a progressive, proportional and regressive tax system is the way the __________ tax rate responds to change in GDP.
average
The more progressive the tax system, the greater the economy's:
built-in stability
Government can use tax increases to reduce ___________ spending.
consumption
Restrictive fiscal policy is also known as ______________ fiscal policy.
contractionary
When demand-pull inflation occurs, what kind of fiscal policy may help control it?
contractionary
Fiscal The manipulation of taxes and federal spending in order to stimulate the economy or reduce inflation is known as expansionary or contractionary ____________ policy.
fiscal
Projected deficits and surpluses are subject to large and frequent changes as government altars it's _________ policy and GDP growth accelerates or slows.
fiscal
The ________ effect for inflation occurs as an increase in the price level due to increases in aggregate demand, but when aggregate demand decreases, product prices, wage rates, and per-unit production costs are inflexible downward.
ratchet
A decrease in aggregate demand reduces
real GDP
Increases in aggregate demand that expand real output beyond the full-employment level tend to move the price level upward. Declines in aggregate demand do not seem to push the price level downward. This is known as what effect?
ratchet
An economy producing below potential output is considered to be operating in a ____________ gap.
recessionary
Economists who believe there are many unmet social and infrastructure needs in the economy usually recommend that government spending be increased during what type of economic period?
recessionary
Consumers who believe a tax increase is only temporary may _________ their savings to pay the tax while maintaining their present consumption.
reduce
The government can ________ taxes to shift the aggregate demand curve rightward.
reduce
To positively stimulate an economy using fiscal policy, government spending should __________, and taxes should _________.
rise; fall
An increase in taxes of $4 billion in an economy with a MPC of 0.75 will initially reduce _________ by $1 billion
savings
If government disregards or underestimates the multiplier effect, contractionary fiscal policy could cause aggregate demand to:
shift leftward further than potential output
When the government uses contractionary fiscal policy to correct demand-pull inflation, what prevents the price level from returning to it's former level?
the ratchet effect
What automatically happens to tax receipts when GDP declines?
they decline
Increases in which of the following will always accompany a negative GDP gap?
unemployment
Virtually any tax will yield more tax revenue as _________ rises.
GDP
Taxes restrain the economic expansion because they reduce what?
Household and business spending
The average tax rate remains constant as GDP rises in what kind of tax system?
Proportional
Built-in stability constitutes which of the following policies?
- "automatic" budgetary policy - "passive" budgetary policy - Non discretionary budgetary policy
Which of the following are fiscal tools that a government may use to eliminate an inflationary GDP gap?
- decrease government spending - raise taxes - a combination of both reduced government spending and higher taxes
Why does the crowding-out effect focus it's attention on investment?
Because investment is the most volatile component of GDP
Why would a tax reduction thought to be temporary not increase present consumption spending and aggregate demand as much as expected?
Because people are preparing for the expected higher tax rate in the future.
Why is the crowding-out effect less likely to be a problem during a recession?
Because slow sales do not encourage businesses to invest
Why does the recognition lag occur?
Because the economy does not move smoothly through the business cycle.
Automatic changes in tax revenues over the course of the business cycle creates what?
Built-in stability
___________ can only dampen, not eliminate swings in real GDP.
Built-in stabilizers
Discretionary policy consists of deliberate changes in government spending and taxation designed to achieve full employment, control inflation, and encourage economic growth
Fiscal
A declining _____ leads to a tax receipt decline and moves the government's budget from surplus toward deficit.
GDP
In the US tax system, net tax revenues vary directly with:
GDP
Tax revenues automatically rise and the budget moves from deficit toward surplus as the economy moves toward a higher:
GDP
What type of policy do economists generally agree is the best month-to-month stabilization tool for the US economy?
Monetary
Personal income taxes have progressive rates and generate what kind of increases in tax revenues as GDP expands?
More-than-proportionate
_________ taxes are tax revenues minus transfers and subsidies.
Net
How do transfer payments behave in relation to tax revenues as the economy goes through a business cycle?
Opposite (Recall that when there is economic growth, tax revenues increase and there is less of a need for transfer payments such as unemployment compensation)
______________ considerations may outweigh economic considerations in the formulation of fiscal policy.
Political
The average tax rate rises with GDP in what kind of tax system?
Progressive
Which of the following is an example of a built-in stabilizer?
The U.S. tax system
When tax revenues exceed government spending, it is called
a budget surplus
Stopping inflation is a matter of halting the rise of the price level, not trying to lower it to the previous level.
True
True or false: The ratchet effect describes that the price level can remain stuck at it's old level even when aggregate demand declines.
True
A __________ __________ budget is used to assess the discretionary fiscal policy and determine whether it is expansionary, contractionary, or neutral.
cyclically adjusted
Government may choose to combine spending decreases and tax increases in order to _________ aggregate demand and curb inflation.
decrease
When GDP falls during a recession and tax revenue automatically __________ government spending increases and cushions the economic contraction.
decrease
During a recession, the government can _______ taxes to increase consumption and shift the aggregate demand curve to the ________.
decrease, right
A budget ________ is government spending in excess of tax revenues.
deficit
If the economy starts out with a balanced Federal budget, a subsequent expansionary fiscal policy will create a budget ___________.
deficit
An economy's potential output is also known as:
full-employment output
Over the course of the business cycle, _________ change automatically in ways that stabilize the economy.
government tax revenues
State and local government are similar to households and private businesses in that the _________ expenditures during prosperity and ________ them during recession.
increase; cut
An inflationary GDP gap will cause further ____________ because input prices rise in the long run in order to meet the increase in output prices.
inflation
The up-sloping aggregate supply curve means that rightward shifts of aggregate demand result more in demand-pull ___________ than in increased output.
inflation
When the government borrows money and the money supply is held constant, overall demand for money increases, as does the interest rate. Some private __________ business may be choked off as the interest rate rises and this is an example of the crowding-out effect.
investment
To induce an increase in consumption through a tax-cut, the smaller the MPC is, the ________ the tax-cut needs to be:
larger
To have the same impact on aggregate demand as a $100 billion increase in government spending, a tax-cut would need to be:
larger than $100 billion
An ___________ lag occurs between the time fiscal action is taken and the time that action affects output, employment, and the price level.
operational
The enactment of discretionary fiscal policy may be slowed because it is conducted in a __________ arena.
political
In a _____________ tax system, the average tax rates falls as GDP rises.
progressive
A built-in ____________ is anything that increases the government's budget deficit (or reduces it's budget surplus) during a recession and increases it's budget surplus (or reduces it's budget deficit) during an expansion without requiring explicit action by policymakers.
stabilizer
When the economy faces demand-pull inflation, fiscal policy should move towards a government budget
surplus
The built-in stabilizers of an economy depends on the responsiveness of _______ revenues to changes in GDP
tax
The preference for increasing or decreasing either government spending or taxes _______ to eliminate recession or inflation depends on one's view as to whether government is too large or too small.
taxes
Which of the following is a potential flaw of fiscal policy?
the crowding-out effect
Government spending is decreased by $5 billion and the resulting decline of aggregate demand is $20 billion. This is due to:
the multiplier
The aggregate demand curve shifts by an amount greater than an initial change in government spending. This is caused by
the multiplier effect