Chapter 12

Which of the following best describes the crowding-out effect?

An increase in borrowing by the government will push interest rates upward, which will lead to a reduction in private spending.

If the crowding-out effect is strong, how will the potency of discretionary fiscal policy be affected?

It will make fiscal policy less potent.

Supply-side economics stresses that high marginal tax rates

discourage people from working harder and using their resources productively.

According to new classical economists, the most appropriate policy during a recession would be for the government to

do nothing.

Public choice analysis indicates that it will be politically more attractive to

enact expansionary fiscal policy during a recession than to enact restrictive fiscal policy during an economic expansion.

The political incentive structure tends to

encourage budget deficits during both recessions and expansions.

According to the new classical view, budget deficits will

fail to stimulate aggregate demand because people will save more in order to pay the higher future taxes implied by the expansion in government debt.

The expansionary effects of an increase in government expenditures will tend to be offset, at least partially, if

government borrowing drives interest rates upward.

According to the crowding-out effect, expansionary fiscal policy will lead to

higher interest rates, an appreciated dollar, and reduced net exports.

The supply-side effects of a reduction in taxes are the result of

increased attractiveness of productive activity relative to leisure and tax avoidance.

In the new classical model, a $100 billion increase in government purchases financed by borrowing will

leave the interest rate, aggregate demand, and real output unchanged.

The new classical model implies that substitution of debt for tax financing

leaves wealth, and therefore aggregate demand, unchanged because the debt will require higher future tax rates.

If the government cuts the tax rate, workers get to keep

more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.

Both the crowding-out effect and new classical model indicate that

there are side effects of budget deficits that will substantially, if not entirely, offset their expansionary impact on aggregate demand.

When the government funds a project that will create jobs, the funds for the project

will have to be either taxed or borrowed from the private sector.

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?

The crowding-out effect

Which of the following provides the clearest statement of the Ricardian equivalence theorem?

The finance of government spending with additional debt is essentially the same thing as finance with higher taxes because the larger debt implies higher taxes in the future.

The crowding-out effect stresses that increased government borrowing to cover a budget deficit will cause

a higher interest rate and appreciation of the U.S. dollar.

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.

Supply-side economics stresses that

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