chapter 13 macro econ

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $40 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand?

a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $40 billion? The first step is to find the expenditure multiplier. Expenditure multiplier = 1/(1 - MPC) = 1/(1 - 0.8) = 1/0.2 = 5. The second step is to find the change in government spending required to shift the aggregate demand schedule rightward by $40 billion. Here, we use the following relationship: ΔAD = expenditure multiplier × Δgovernment spending. Rearranging: ΔGovernment spending = ΔAD/expenditure multiplier. ΔGovernment spending = $40 billion/5 = $8.00 billion. Thus, we should increase government spending by $8.00 billion. How large a tax cut would be needed to achieve the same increase in aggregate demand? The first step is to calculate the tax multiplier. Here, we need to recognize that a tax cut will need to move through consumption before impacting the economy. Therefore, we need to multiply the tax cut by the MPC before applying the multiplier process. Tax multiplier = - (MPC/(1 - MPC)) = - (0.8/(1 - 0.8)) = - (0.8/0.2) = -4. Note that the tax multiplier is negative because changes in taxes and aggregate demand (and aggregate expenditures) are inversely related. The second step is to find the change in taxes required to shift the aggregate demand schedule rightward by $40 billion. Here, we use the following relationship: ΔAD = tax multiplier × Δtaxes. Rearranging: ΔTaxes = ΔAD/tax multiplier. ΔTaxes = $40 billion/(-4) = - ($40 billion/4) = - $10.00 billion. Thus, we should cut taxes by $10.00 billion.

To say that "the U.S. public debt is mostly held internally" is to say that

bulk of debt is owned by uc citizens and instiutons

A major advantage of the built-in or automatic stabilizers is that they

require no legislative action by Congress to be made effective

The crowding-out effect suggests that

government borrowing to finance the public debt increases the real interest rate and reduces private investment.

Which of the following represents the most expansionary fiscal policy?

10 bill increase on gov spending

The accompanying table gives budget information for a hypothetical economy. Assume that all budget surpluses are used to pay down the public debt. If year 1 is the first year of this nation's existence and year 4 is the present year, the public debt as a percentage of GDP in year 4 is

3.9

Which of the following best describes the built-in stabilizers as they function in the United States?

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

Which of the following best describes the idea of a political business cycle?

Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

Reductions in federal tax rates on personal and corporate income.

In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. which is true

There is a crowding-out effect of $20 billion.

The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand but also at the same time raising taxes to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is:

a mediocre and contradictory combination of tax and expenditure changes

Suppose that a country has no public debt in year 1 but experiences a budget deficit of $20 billion in year 2, a budget deficit of $20 billion in year 3, a budget surplus of $10 billion in year 4, and a budget deficit of $2 billion in year 5.

-

Refer to the diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at

AD3

Which of the following statements is correct? Multiple ChoiceBuilt-in stability only partially offsets fluctuations in economic activity.Built-in stability works in halting inflation, but it cannot alleviate unemployment.Built-in stability can be relied on to eliminate completely any fluctuation in economic activity.Built-in stability has eliminated the need for discretionary fiscal policy.

Built-in stability only partially offsets fluctuations in economic activity.

Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2,

government should undertake neither an expansionary nor a contractionary fiscal policy.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing

a negative gdp gap

The effect of a government surplus on the equilibrium level of GDP is substantially the same as

an increase on saving

b. If its real GDP in year 5 is $104 billion, what is this country's public debt as a percentage of real GDP in year 5?

b. If real GDP in year 5 is $104 billion, this country's public debt as a percentage of real GDP in year 5 is 30.77 percent (= $32 (debt)/$104 (GDP) = 0.3077, or 30.77 percent).

The U.S. public debt

consists of the historical accumulation of all past federal deficits and surpluses.

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by

decreasing taxes by 25 bill

Discretionary fiscal policy will stabilize the economy most when

deficits are incurred during inflations and surpluses during recessions.

Suppose the federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government's public debt would have

increased by 20 mill

If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by

increasing government spending by $4 billion.

A tax reduction of a specific amount will be more expansionary the

larger is the economy's MPC.

A contractionary fiscal policy is shown as a

leftward shift in the economy's aggregate demand curve

The political business cycle refers to the possibility that

politicans will manipulate to get reelected

Which of the following would help a government reduce an inflationary output gap?

raising taxes, decreasing government spending

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should

reduce tax rates and/or increase government spending.

A specific reduction in government spending will dampen demand-pull inflation by a greater amount the

smaller is the MPS

Built-in (or automatic) stabilizers work by changing ______ so that changes in GDP are reduced b. What type of tax system would have the most built-in stability?

taxes and government payouts b. A progressive tax because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes.

The public debt is the amount of money that

the federal government owes to holders of U.S. securities.

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. The recognition lag of fiscal policy is reflected in events

1 and 2

The accompanying table gives budget information for a hypothetical economy. Assume that all budget surpluses are used to pay down the public debt. The budget deficit in year 3 is

100 bill

The amount by which government expenditures exceed revenues during a particular year is the

budeget deficet

The actual budget deficit of the federal government in 2009 was about $1.4 trillion. On the basis of this information, it

cannot be determinded

Discretionary fiscal policy refers to

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Contractionary fiscal policy is so named because it

is aimed at reducing aggregate demand and thus achieving price stability.

Expansionary fiscal policy is so named because it

is designed to expand real GDP

(Last Word) Which of the following would not help to relieve the Social Security and Medicare shortfalls?

restricting immigration of skilled working-age adults

Which of the following fiscal policy actions is most likely to increase aggregate supply?

an increase in government spending on infrastructure that increases private sector productivity

The amount by which federal tax revenues exceed federal government expenditures during a particular year is the

budget surplus

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. The administrative lag of fiscal policy is reflected in events

3 and 4

Suppose that the national economy is experiencing a recession with an estimated recessionary gap of $20 billion. Congress is considering the use of fiscal policy to ease the recession, and due to current political sentiments, it has determined that the maximum spending increase the government is willing to support is $2 billion. The government wants to make up the remainder of the recessionary gap using tax cuts. If a spending increase of $2 billion is approved and the MPC is 0.75, by how much will taxes need to be reduced to close the remainder of the recessionary gap?

Change in Income = [Change in government spending / (1 - MPC)] + [ - MPC x Change in taxation / (1 - MPC)] $ 20 billion =[ $ 2 billion / (1 - 0.75)] + [ - 0.75 x change in taxation / (1 - 0.75)] $ 20 billion = $ 8 billion - 3 x Change in taxation $ 12 billion = - 3 x Change in taxation Change in taxation = - 4 billion So, taxes need to be reduced by $ 4 billion

Which of the following statements is correct?

There is a tendency for the public debt to grow during recessions.

b. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt (i.e., maintaining the budget balance at its current value).

b. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt. To answer this question, we want to use the balanced budget multiplier concept. First, we increase government spending by $40 billion. This results in an increase in aggregate demand of $200 billion (= 5 (expenditure multiplier) × $40 billion). Second, to finance this government spending of $40 billion, we raise taxes by an equivalent amount to ensure the level of outstanding debt does not change. That is, we also increase taxes by $40 billion. This results in a decrease in aggregate demand of $160 billion (= -4 (tax multiplier) × $40 billion = - $160 billion (decline in AD)). Combining the two effects above, we have an increase in aggregate demand of $40 billion (= $200 (increase from government spending) and -$160 (decrease from increase in taxes)). This increase was achieved without increasing the debt.

Suppose that a country has no public debt in year 1 but experiences a budget deficit of $20 billion in year 2, a budget deficit of $20 billion in year 3, a budget surplus of $10 billion in year 4, and a budget deficit of $2 billion in year 5.a. What is the absolute size of its public debt in year 5?

a. Public debt is the sum of deficits and surpluses (negative deficits) over time. Since the country started year 1 with no public debt, the country's debt at the end of year 5 is $32 billion (= $20 (deficit year 2) + $20 (deficit year 3) - $10 (surplus year 4, negative deficit) + $2 (deficit year 5)).

Suppose the fictitious country of Islandia begins fiscal year 1 with no public debt. The tax revenues and government expenditures for the next five years are shown in the table below. a. Calculate the deficit or surplus for each fiscal year and record it in the table below. b. At the end of fiscal year 5, what is the total public surplus or debt? c. Suppose GDP is $252 billion. What percent of GDP does the public debt represent?

a. The deficit for each fiscal year is calculated by subtracting total government expenditures for the year from the total tax revenues for the year. If the result is a positive number, the government has a surplus for that fiscal year. A negative number indicates that the government has a deficit for that fiscal year. For example, in fiscal year 1, government expenditures total $122 billion and tax revenues are $120 billion. Subtracting revenues from expenses, we get $120 billion − $122 billion = -$2 billion. The negative number indicates that the government ran a deficit that year (expenses exceeded revenues). b. The total public debt (or surplus) is simply the sum of all the deficits and surpluses accumulated in each year. In this case, -$2 billion + -$1 billion + $2 billion + -$6 billion + -$4 billion = -$11 billion. If the total number is negative, it indicates that the country has a public debt; if it is positive, it indicates a public surplus. c. If GDP is $252 billion, the public debt represents (absolute value of $-11 billion /$252 billion) × 100 = 4.4 percent of GDP.