Chapter 11

Which of the following best expresses the central idea of countercyclical fiscal policy?

Deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.

Which of the following is an appropriate fiscal policy to address the inflation that occurs when the economy is above potential GDP?

Increase taxes to reduce aggregate demand.

Which of the following economists is most responsible for the view that a macro policy designed to balance the budget will contribute to economic instability?

John Maynard Keynes

Suppose long-run equilibrium is present and the government budget is in balance. Which of the following would be most likely to occur if the economy falls into a recession?

a budget deficit

According to the Keynesian view, if policy makers thought the economy was about to enter an inflationary boom, which of the following would be most appropriate?

a tax increase

If the federal government runs a budget deficit in order to finance an increase in spending, where do the funds to finance the spending come from?

additional bonds issued by the U.S. Treasury

The crowding-out effect stresses that

additional government borrowing to finance a larger deficit will increase the demand for loanable funds, causing real interest rates to rise.

According to the Keynesian view, which of the following would most likely cause an increase in aggregate demand?

an increase in the budget deficit

The distinction between discretionary fiscal policy and the use of automatic stabilizers is that

automatic stabilizers, once adopted, are built into the structure of the economy.

Supply-side economics stresses that

changes in marginal tax rates exert important effects on real output and employment

Which of the following provides the best information about the direction of the government's fiscal policy?

changes in the size of the federal government's budget deficit or surplus

Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called

countercyclical fiscal policy

Changes in government spending and/or taxes as the result of legislation, is called

discretionary fiscal policy.

When the federal government is running a budget deficit,

government expenditures exceed government revenues

A balanced budget is present when

government revenues equal government expenditures.

When the federal government is running a budget surplus,

government revenues exceed government expenditures

If the federal government is running a budget surplus,

it will be able to reduce its outstanding debt

Automatic stabilizers are government programs that tend to

reduce the ups and downs in aggregate demand without legislative action

Federal budget deficits generally grow during recessions because

tax revenues decrease while transfer payments increase

If the federal government is running a budget deficit,

the U.S. Treasury will finance the deficit by issuing additional bonds.

The crowding-out effect refers to the tendency of

the additional borrowing accompanying larger budget deficits to increase interest rates and reduce private spending.

If the government owes $4,500 billion and then borrows $300 billion more this year,

the debt is $4,800 billion and the deficit is $300 billion

The primary tool of fiscal policy is

the federal budget

The crowding-out effect indicates that budget deficits

will lead to additional borrowing and higher interest rates that will reduce the level of private spending.