chapter 31

The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n):

Recognition lag

Proponents of the notion of a "political business cycle" suggest that:

A possible cause of economic fluctuations is the use of fiscal policy by policy-makers for political purposes and goals

The public debt is the:

Accumulation of all past deficits minus all past surpluses

The lag between the time that the need for fiscal action is recognized and the time action is actually taken is referred to as the:

Administrative lag

Which of the following statements is correct?

Built-in stability only partially offsets fluctuations in economic activity

How is the public debt calculated?

By cumulating the annual difference between tax revenues and government spending over the years

State and local governments are limited in their ability to respond to recessions because of:

Constitutional and other requirements to balance their budgets

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n):

Contractionary fiscal policy

Discretionary fiscal policy is often initiated on the advice of the:

Council of Economic Advisers

The group of three economists appointed by the president to provide fiscal policy recommendations is the:

Council of Economic Advisers

Which of the following is considered a legitimate concern of a large public debt?

Crowding-out of private investment

The crowding-out effect arises when:

Government borrows in the money market, thus causing an increase in interest rates

A Federal budget deficit is financed by the:

Government issuance or sale of Treasury securities

A budget surplus means that:

Government revenues are greater than expenditures in a given year

Which combination of fiscal policy actions would most likely offset each other?

Increase taxes and government spending

If the crowding-out effect is at its maximum strength, it follows that an increase in government spending would:

Not affect aggregate demand and GDP

Most economists believe that fiscal policy is:

Not as good as monetary policy for month-to-month stabilization

Assume that if there was no crowding-out, an increase in government spending would increase GDP by $100 billion. On the other hand, if there had been full crowding-out, then GDP would have:

Not increased

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.

The goal of expansionary fiscal policy is to increase:

Real GDP

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

Fiscal policy is enacted through changes in:

Taxation and government spending

One timing problem in using fiscal policy to counter a recession is the "administrative lag" that occurs between the:

Time the need for the fiscal action is recognized and the time that the action is taken

The economy starts out with a balanced Federal budget. If the government then implements expansionary fiscal policy, then there will be a:

budget deficit

According to Congressional Budget Office (CBO) projections:

budget deficits are expected to remain large for the next several years

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

budget surplus

The U.S. public debt:

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

The federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the:

crowding-out effect

Fiscal policy refers to the:

deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.

The crowding-out effect suggests that:

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

The crowding-out effect of expansionary fiscal policy suggests that:

government spending increases at the expense of private investment

An economist who favored expanded government would recommend:

increases in government spending during recession and tax increases during inflation

The crowding-out effect of expansionary fiscal policy suggests that:

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

Discretionary fiscal policy refers to:

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

Discretionary fiscal policy is so named because it:

involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.

Expansionary fiscal policy is so named because it:

is aimed at reducing aggregate demand and thus achieving price stability

Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending:

is financed by borrowing

Since 2002, the United States has had:

large federal budget deficits

The political business cycle refers to the possibility that:

politicians will manipulate the economy to enhance their chances of being reelected

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 is:

strongest when the economy is at full employment

An economist who favors smaller government would recommend:

tax cuts during recession and reductions in government spending during inflation.

If the government wishes to increase the level of real GDP, it might reduce:

taxes

The public debt is the amount of money that:

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

When current government expenditures exceed current tax revenues and the economy is achieving full employment:

the government budget has a deficit

When current tax revenues exceed current government expenditures and the economy is achieving full employment:

the government budget has a 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. Refer to the information. The recognition lag of fiscal policy is reflected in events:

1 and 2

The set of fiscal policies that would be most contractionary would be a(n):

Decrease aggregate demand

The effect of an increase in the government budget deficit on the equilibrium level of GDP is essentially the same as a(n):

Decrease in saving

The crowding-out effect works through interest rates and it tends to:

Decrease the effectiveness of an increase in government spending

The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending would:

Decrease, thus partially offsetting the fiscal policy

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n):

Expansionary fiscal policy

A Federal budget deficit exists when:

Federal government spending exceeds tax revenues in a given year

Assume that if there was no crowding-out, an increase in government spending would increase GDP by $100 billion. If there had been partial crowding-out, however, then GDP would have:

Increased by less than $100 billion

The crowding-out effect suggests that:

Increases in government spending may reduce private investment

The crowding-out effect tends to be stronger when the economy:

Is at, or close to, full employment

The public debt is held as:

Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds

The total amount of debt owed by the Federal government is represented by the total value of the outstanding:

U.S. government securities

An appropriate fiscal policy for a severe recession is:

a decrease in tax rates

An appropriate fiscal policy for severe demand-pull inflation is:

a tax rate increase

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

an increase in saving

The federal budget deficit is found by:

budget deficit

Built-in stability means that:

with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower 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. Refer to the information. The administrative lag of fiscal policy is reflected in events:

3 and 4

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. Refer to the information. The operational lag of fiscal policy is reflected in event(s):

5

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes:

the crowding-out effect