ECON 205 Fiscal Policy

A common definition of a recession is: a period in which an economy experiences a decline in real GDP for at least _________ consecutive quarters or ________ months.

2,6

With an MPC of 0.6, the expenditures multiplier will be equal to

2.5

With an MPC of 0.75, the expenditures multiplier will be equal to

4

With an MPC of 0.8, the expenditures multiplier will be equal to

5

Which of the following are tools of fiscal policy?

Taxation and government purchases

Active fiscal policy calls for reducing government purchases in case of:

demand-pull inflation.

Income minus taxes gives us the value for ______ income.

disposable

Income minus taxes gives us the value for ________ income.

disposable

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment is called full ______ GDP.

employment

The application of fiscal policy to increase aggregate demand is called ________ fiscal policy.

expansionary

When the government borrows money so it can increase government spending or decrease taxes,:

it increases the demand for loanable funds.

The ______ lag occurs because active ________ policy requires legislation to authorize an increase in government purchases or a decrease in taxes or both.

legislative, fiscal

When the government borrows money so it can increase government spending or decrease taxes, it increases the demand for

loanable funds

Money that is available in an economy for the private sector and government to borrow is called:

loanable funds.

The condition Y = Yfull employment refers to ______ _______ equilibrium.

long run

Fiscal policy is:

the changes in government purchases and/or taxes designed to achieve full employment and low inflation.

The multiplier effect is/are:

the concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP.

The payment made to agents that lend or save money expressed as an annual percentage of the monetary amount lent or saved is called:

the interest rate.

Full-employment GDP refers to:

the level of real GDP produced in an economy when it is operating at the natural rate of unemployment.

The concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP is called

the multiplier effect

The concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP is called:

the multiplier effect.

The interest rate is:

the payment made to agents that lend or save money.

Crowding out refers to

the process by which an increase in government borrowing results in less borrowing.

Crowding out refers to:

the process by which an increase in government borrowing results in less borrowing.

The business cycle is:

the short-term fluctuations experienced in the economy due to changes in levels of economic activity.

With an MPC of 0.8, the tax multiplier will be equal to

-4

Mathematically, the tax multiplier equals:

-MPC/(1-MPC)

Which of the following are the tools of fiscal policy? Taxation Open Market Operations Interest Rate Changes Government Purchases Multiple choice question.

1 and 4

Mathematically, the expenditures multiplier equals:

1/(1 - MPC).

Which of the following policies involves decreasing government purchases and/or increasing taxes?

A contractionary fiscal policy

The economy experiences a positive demand shock causing the economy to boom. Which is an example of an automatic stabilizer that will work to reduce the undesired expansion?

Average tax rates will automatically rise

Which is a frequently used tool of fiscal policy?

Changes in government purchases

Which of the following best describes fiscal policy?

Changes in government purchases and/or taxes designed to achieve full employment and low inflation

Real GDP expenditures is given by:

Consumption (C) + Gross Investment (I) + Government Purchases (G) + Net Exports (NX).

The goal of automatic stabilizers during an undesired economic boom is to:

Decrease consumption spending and aggregate demand.

This policy involves increasing government purchases and/or decreasing taxes.

Expansionary fiscal policy

Fiscal policy relies on three assumptions: Recognizing the start of a recession. Government quickly determines effective policy. The policy is immediately effective. Which of these assumptions hold in the real world?

None of the assumptions hold in the real world.

When taxes increase, AD:

decreases

Which of the following is a limitation of implementing fiscal policies during a recession?

There are lags that delay the effectiveness of fiscal policy.

The tax multiplier times the initial change in taxes equals:

a change in aggregate demand.

A decrease in transfer payments has the same basic effect on aggregate demand as:

a decrease in government purchases.

A decline in real output for at least two consecutive quarters is called:

a recession.

A phase of the business cycle characterized by increasing real GDP income and employment is called:

an expansion.

Changes to taxes and spending that occur without any direct action by the government are called

automatic stabilizers

Changes to taxes and spending that occur without direct action by the government are called:

automatic stabilizers.

When government spending decreases, AD:

decreases.

The short-term fluctuations experienced in an economy due to changes in the levels of economic activity refers to the ______ cycle.

business

The application of fiscal policy to decrease aggregate demand is called a(n) ________ fiscal policy.

contractionary

The process by which an increase in government borrowing results in less borrowing by businesses and consumers for private investment is called

crowding out

The process by which an increase in government borrowing results in less borrowing by businesses and consumers for private investment is called:

crowding out.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $60 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.75, taxes would need to:

decrease by $20 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. An expansion occurs resulting from a $100 billion increase in aggregate demand. In order to restore the economy to full employment given a MPC of 0.80, government purchases would need to:

decrease by $20 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $100 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.80, taxes would need to:

decrease by $25 billion.

Suppose an economy is in long-run equilibrium at a price level of 100 and a full-employment real GDP of $520 billion. A recession occurs because of a $120 billion decrease in aggregate demand. To restore the economy to full employment given an MPC of 0.75, taxes would need to:

decrease by $40 billion.

A change in aggregate demand equals the _________ multiplier times the initial change in expenditures.

expenditures

Consumption (C) + Gross Investment (I) + Government Purchases (G) + Net Exports (NX) characterizes real GDP

expenditures

Net exports equals:

exports minus imports

As an economy expands, the number of people who rely on government programs such as Medicaid, food stamps, and housing assistance fall, causing government expenditures to automatically

fall

Changes in government purchases and/or taxes designed to achieve full employment and low inflation is called _______ policy.

fiscal

Changes in government spending and changes in taxes are considered the primary tools of __________ policy.

fiscal

Government _______ policy has limitations that reduce its effectiveness and may even cause the opposite of what was intended.

fiscal

Changes in government purchases and/or taxes designed to achieve full employment and low inflation is called:

fiscal policy.

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment is called:

full-employment GDP.

Transfer payments are payments the _________ makes to households and businesses that do not require an exchange of productive activity.

government

One of the most frequently used tools of fiscal policy is changing:

government purchases.

The ______ lag occurs because once a stimulus package is approved the government has to spend the money which needs time to work its way through the economy.

implementation

If the economy is experiencing a recession, the goal of fiscal policy will be to:

increase aggregate demand.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $100 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.80, government purchases would need to:

increase by $20 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $50 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.6, government purchases would need to:

increase by $20 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $600 billion. An expansion occurs resulting from a $80 billion increase in aggregate demand. In order to restore the economy to full employment given a MPC of 0.80, taxes would need to:

increase by $20 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $100 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.75, government purchases would need to:

increase by $25 billion.

When government spending increases, AD:

increases

When taxes decrease, AD:

increases.

The average U.S. Federal income tax rates increase as as income rises. Thus the U.S. Federal income tax:

is a progressive tax.

Loanable funds refers to:

money that is available in an economy for the private sector and government to borrow.

Exports minus imports gives us ______ exports.

net

Because of the _______ lag, we can't be sure that a proposed stimulus will be the right size to increase aggregate demand by the right amount since any data we see will already be a few months old.

recognition

The ______ lag occurs because we need time to collect and analyze data.

recognition

When an economy is producing above full employment, the goal of fiscal policy will be to:

reduce aggregate demand.

With demand-pull inflation, active fiscal policy calls for ________ government purchases.

reducing

The condition AD = AS refers to _________ - _________ equilibrium.

short-run

In the short run, in order to stimulate aggregate demand and avoid falling output and prices, the government could reduce

taxes

One of the most frequently used tools of fiscal policy is changing:

taxes