Chapter 16 Final Review
What is the multiplier formula?
1/(1-MPC)
If the marginal propensity to consume equals 0.90, the tax rate equals 0.20, what is the value of the government purchases multiplier?
3.57
The simple multiplier effect shows the resulting change in real GDP due to an increase in government purchases or a decrease in taxes assuming that the price level is
Constant
One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase
Current income
The multiplier effect is only a consideration for increases in government purchases. True or False
False
What is the difference between federal government purchases (spending) and federal government expenditures?
Government purchases are included in government expenditures.
Each year that the federal government runs a deficit, the federal debt
Grows
What is crowding out?
Increased government spending leads to borrowing more which means interest rates go up and this leads to a decrease in investment when an increase in government spending decreases a component of GDP (most likely investment)
As a result, when AD shifts to the right, in reality the change in real GDP will be ________ it would be if the price level were constant.
Less than
According to the multiplier effect, an initial decrease in government purchases decreases real GDP by ___________ the initial decrease in government purchases.
More than
After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?
No. The increase in defense spending after that date was designed to achieve homeland security objectives.
In the long run, increases in government purchases result in
Partial crowding out
What are the gains to be had from simplifying the tax code?
Resources from the tax preparation industry freed up for other endeavors. Increased efficiency of households and firms. Greater clarity of the decisions made by households and firms.
Each year that the federal government runs a surplus, the federal debt
Shrinks
The higher the tax rate, the __________ the multiplier effect.
Smaller
Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge LOADING... is called
Supply-side economics
In reality, the SRAS is
Upward sloping
When is it considered "good policy" for the government to run a budget deficit?
When borrowing is used for long-lived capital goods.
Does government spending ever reduce private spending?
Yes, due to crowding out.