CHAPTER 16
Which of the following statements about the federal debt is correct?
If the debt becomes very large relative to the economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt.
What is the long-run effect of a permanent increase in government spending?
The decline in investment, consumption, and net exports exactly offsets the increase in government spending; therefore, real GDP remains unchanged.
In the long run, most economists agree that a permanent increase in government spending leads to
a decrease in private spending by the same amount that government spending increased.
budget deficit
a shortfall of tax revenue from government spending
budget surplus
an excess of tax revenue over government spending
The effect on the economy of tax reduction and simplification is
an increase in the quantity of real GDP supplied at every price level, and a shift in the long-run aggregate supply curve.
It is difficult for a government to run a budget surplus during a recession because
automatic stabilizers such as transfer payments increase.
Expansionary fiscal policy
can be effective in the short run.
An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.
decrease; rise; fall
True or false: The higher the tax rate, the larger the multiplier effect.
false
An increase in government purchases will increase aggregate demand because
government expenditures are a component of aggregate demand.
Budget deficits automatically __________ during recessions and __________ during expansions.
increase; decrease
Between the beginning of 2009 and the end of 2010, real GDP ________, while employment ________.
increased by 4.0 percent; declined by 3.3 million
The multiplier effect refers to the series of
induced increases in consumption spending that result from an initial increase in autonomous expenditures
The cyclically adjusted budget deficit
is measured as if the economy were at potential real GDP.
If a tax cut has supply-side effects, then
it will affect both aggregate demand and aggregate supply.
Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
lower; lower
Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be _________.
lower; lower
Poorly timed discretionary policy can do more harm than good. Getting the timing right with fiscal policy is generally
more difficult than with monetary policy.
Expansionary fiscal policy has a ________ multiplier effect on equilibrium real GDP, and contractionary fiscal policy has a ________ multiplier effect on equilibrium real GDP.
positive; negative
crowding out refers to
the decline in private expenditures that result from an increase in government purchases.
The long-run growth rate of real GDP depends primarily on
the growth rate of labor productivity as measured by the growth in real GDP per hour worked and the growth in the number of hours worked.
Economists believe that the smaller the tax wedge for any economic activity, such as working, saving, investing, or starting a business,
the more of that economic activity will occur
The national debt is best measured as
the total value of U.S. Treasury securities outstanding.
True or false: The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.
true
true or false: Few economists believe the federal government should attempt to balance its budget every year.
true
About ________ of the American Recovery and Reinvestment Act stimulus package took the form of increases in government expenditures, and about ________ took the form of tax cuts.
two-thirds; one-third
