Econ 1A Ch 27

Consider the same list of arguments about changing to a flat tax. Which two out of the above list of arguments would you advance against a flat​ tax?

B and C

What is meant by crowding​ out?

Crowding out is a decline in private expenditures as a result of increases in government purchases.

How does a budget deficit act as an automatic stabilizer and reduce the severity of a​ recession?

During​ recessions, tax obligations fall due to falling wages and profits. Consumers spend more than they would in the absence of social insurance​ programs, like unemployment. Transfer payments to households increase.

What is fiscal​ policy?

Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.

The hypothetical information in the following table shows what the situation will be in 2021 if the federal government does not use fiscal​ policy: Year Potential GDP Real GDP Price Level 2020 ​$18.0 trillion ​$18.0 trillion 120.3 2021 ​$18.4 trillion ​$18.0 trillion 122.7

If Congress and the president want to keep real GDP at its potential level in​ 2021, they should use an expansionary fiscal policy​, which would mean increasing government spending or cutting taxes. If Congress and the president are successful in keeping real GDP at its potential level in​ 2021, state whether each of the following will be​ higher, lower, or the same as it would have been if they had taken no​ action: Real GDP will be higher. Potential real GDP will be the same. The inflation rate will be higher. The unemployment rate will be lower.

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model

If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06​, we would expect the federal government to pursue​ a(n) contractionary fiscal policy. If the​ government's policy is​ successful, what is the effect of the policy on the following macroeconomic​ indicators? Actual real GDP decreases. Potential real GDP does not change. Price level decreases. Unemployment increases.

Which of the following best describes the difference between crowding out in the short run and in the long​ run?

In the short​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

What changes should they make if they decide a contractionary fiscal policy is​ necessary?

In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes?

In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes.

Which can be changed more​ quickly: monetary policy or fiscal​ policy?

Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.

Complete the following table for a static​ AD-AS model:

Problem Policy Actions Result Recession Expansionary ↑Gov't spending or decrease taxes Real GDP and price level rise Rising inflation Contractionary Decrease gov't spending or ↑Taxes Real GDP and price level fall

What is the difference between the federal budget deficit and federal government​ debt?

The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.

Who is responsible for fiscal​ policy?

The federal government controls fiscal policy.

Which of the following are examples of discretionary fiscal​ policy? ​(Check all that​ apply.)

The government provides stimulus funds to repair roads and bridges to increase spending in the economy. Your answer is correct. D. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate. Your answer is correct. E. The president and Congress reduce tax rates to increase the amount of investment spending.

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending?

Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending.

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not​ increase?

Yes, because fiscal policy and monetary policy are separate things.

When actual GDP is below potential GDP the budget deficit increases because​ of:

an increase in transfer payments and a decrease in tax revenues

Government spending and taxes that increase or decrease without any actions taken by the government are referred to as

automatic stabilizers.

If the government increases expenditure without raising​ taxes, this will

increase the budget deficit and require the government to borrow additional funds. B. cause the interest rate to​ increase, thereby, reducing private investment and crowding out the private sector.

Which of the following are categories of federal government​ expenditures?

interest on the national debt transfer payments grants to state and local governments D. All of the above.

The federal​ government's day-to-day activities include running federal agencies like the Environmental Protection​ Agency, the​ FBI, the National Park​ Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up

less than 10%

Consider the following​ statement: ​"Real GDP is currently​ $17.7 trillion, and potential real GDP is​ $17.4 trillion. If Congress and the president would decrease government purchases by​ $300 billion or increase taxes by​ $300 billion, the economy could be brought to equilibrium at potential​ GDP." If government purchases were to decrease by​ $300 billion or if taxes were increased by​ $300 billion, the equilibrium level of real GDP would decrease by

more than​ $300 billion. Your answer is correct. ​Therefore, the statement above is incorrect.

It would seem that both households and businesses would benefit if the federal income tax were simpler and tax forms were easier to fill out. ​However, tax laws have become increasingly complicated because

the tax laws are used to encourage certain activities and discourage others.

The national debt is best measured as

the total value of U.S. Treasury securities outstanding.

The largest and​ fastest-growing category of federal expenditures is

transfer payments

Suppose a political candidate hired you to develop two arguments in favor of a flat tax. Consider the following list of arguments about changing to a flat​ tax: A. There would be a reduction in paperwork and the compliance cost of the tax system. B. The complexities in the current tax code allow the government to pursue other policy goals. C. A change in the tax code would result in a more unequal distribution of income because the marginal tax rate on​ high-income taxpayers would be reduced. D. There are potential increases in labor​ supply, savings, and investment from a lower marginal tax rate. Which two out of the above list of arguments would you advance in favor of a flat​ tax?

A and D