Econ 5-4

As an elected official, you have been informed that real GDP is below its potential and that action should be taken to encourage economic growth and bring the economy to its long-run equilibrium. If the marginal propensity to consume is 0.8 and the amount of new government spending is $600 billion, by how much would the economy be stimulated?

$3,000 billion

If your marginal propensity to consume is 0.75 and you get an additional $400 in income, you would spend ___________ on consumption.

$300.00

Where MPC is the marginal propensity to consume, the formula for the spending multiplier is:

1/(1 - MPC).

In 1962, the marginal tax rates were as high as:

91%

Which of the following figures illustrates what happens when the government enters the loanable funds market in order to borrow?

A

Which of the following would cause crowding out?

American Recovery and Reinvestment Act

Which of the following is an expansionary fiscal policy?

Both an increase in government spending and decrease in taxes

Supply-side fiscal policy will lead to:

a rightward shift of the long-run aggregate supply curve.

Politicians who always advocate for tax rate cuts, no matter how large the budget deficit is, claim that:

a tax rate cut always leads to an increase in tax revenues.

The Laffer curve shows that:

at some specific tax rate, tax revenue is maximized.

During economic expansions:

outlays decrease and tax revenue increases.

If the marginal propensity to consume is equal to 0.75, the spending multiplier is equal to:

4.0.

If in response to a decrease in taxes of $100 billion, the nation's RGDP increases by $300 billion, which of the following is true?

All of these answers are true.

When fiscal policy is used to manage the economy, there are a number of factors that can delay its impact. Which of the following is an example of a recognition lag?

Although economic conditions seem bad enough to warrant government action, it takes time for economists to confirm that conditions are bad enough.

The second of two significant fiscal policy initiatives enacted by the government during the Great Recession, signed in February 2009 by President Barack Obama, was the:

American Recovery and Reinvestment Act of 2009.

___________ can eliminate recognition lags and implementation lags and thereby alleviate some concerns of destabilizing fiscal policy.

Automatic stabilizers

Which of the following diagrams represents a Laffer curve?

B

The first of two significant fiscal policy initiatives enacted by the government during the Great Recession, signed in February 2008 by President George W. Bush, was the:

Economic Stimulus Act of 2008.

Refer to the table below, which lists the U.S. federal income tax rates for the different income brackets. If the highest point on the Laffer curve corresponds to a tax rate of 30%, then which of the following statements must be false?

Increasing tax rates across all income tax brackets will cause a greater negative impact on tax revenue per return for the fifth income bracket than the sixth bracket.

Which of the following is an example of crowding-out?

The government buys elementary students new school uniforms, which decreases the amount of private spending on school uniforms.

The government of Fredonia increases its spending by $100 million to fight a recession during 2007. If the government's budget was balanced prior to the recession, which of the following is most likely to happen by the end of 2007? Assume that this policy has not yet had any positive effect by the end of 2007.

The government will have a budget deficit of more than $100 million.

Suppose that the president has decided to increase government spending by building more libraries. The legislation was rushed through Congress and enacted without any delay. From here, the libraries will take 10 months to plan and 2 years to build. Which of the following is true?

The planning and building of the libraries represents an impact lag of this policy.

The spending multiplier is:

a formula to determine the total impact on spending from an initial change of a given amount.

Typical fiscal policy focuses squarely on:

aggregate demand.

The goal of contractionary fiscal policy is to shift the __________ curve to the __________.

aggregate demand; leftt

The goal of expansionary fiscal policy is to shift the _________ curve to the _________.

aggregate demand; right

Automatic stabilizers:

are government programs that automatically implement countercyclical fiscal policy in response to economic conditions.

Government programs that automatically implement countercyclical fiscal policy in response to economic conditions are called:

automatic stabilizers.

Depending on how fiscal policy is implemented, it can affect:

both aggregate demand and aggregate supply

The main goal of supply-side fiscal policy is

both to shift LRAS and to change the level of full-employment output.

Long-run aggregate supply shifts are caused by:

changes in resources, technology, and institutions.

Monetary policy is conducted by the Federal Reserve. Fiscal policy is:

conducted by Congress and the president.

If the government starts a new program where it buys every family that lives in Florida a new air conditioner, one may argue this could lead to:

crowding-out

When the government increases spending or decreases taxes to stimulate the economy toward expansion, the government is conducting:

expansionary fiscal policy

If the economy begins to fall into a recession, one would expect Congress and the president to conduct:

expansionary fiscal policy.

The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 are both examples of:

expansionary fiscal policy.

Supply-side fiscal policy involves the use of:

government spending and taxes to affect the production side of the economy.

For relatively lower tax rates, an increase in tax rates will __________ tax revenue.

increase

The American Recovery and Reinvestment Act introduced a large amount of government spending into the economy: $789 billion. With a marginal propensity to consume of 0.75, how much should the program change aggregate demand?

increase aggregate demand by $3,156 billion

Policies that focus on education:

increase effective labor resources and thus increase aggregate supply over time.

Fiscal policy includes:

increases and decreases to both taxes and government spending.

Expansionary fiscal policy leads to:

increases in budget deficits and the national debt during economic downturns.

The new classical critique of fiscal policy asserts that:

increases in government spending and decreases in taxes are largely offset by increases in savings.

Countercyclical fiscal policy:

is fiscal policy that seeks to counteract business-cycle fluctuations.

The relationship between tax rates and tax revenue:

is one of the most highly controversial in politics

Time lags, crowding-out, and savings shifts are all:

issues that arise in the application of activist fiscal policy.

A recognition lag happens because:

it is difficult to determine when the economy is turning up or down.

If the effects of expansionary fiscal policy hit when the economy is already expanding:

it may lead to excessive aggregate demand and inflation.

The multiplier effect of fiscal policy predicts that an increase in government spending by $100 billion will increase total income by $400 billion if the marginal propensity to consume is 0.75. If we account for PARTIAL crowding out, then the increase in income will be

less than $400 billion.

Supply-side fiscal policy explains how taxes and government spending can affect:

long-run aggregate supply.

At ___________ tax rates, ___________ in those tax rates lead to ___________ in total tax revenue.

low; increases; increases

Which of the following fiscal policy initiatives focuses on the supply side of the economy?

lower marginal income tax rates

During recessionary periods:

outlays increase and tax revenue falls

Crowding-out occurs when:

private spending falls in response to increases in government spending.

The three time lags that accompany policy decisions are:

recognition lag, implementation lag, and impact lag.

Automatic stabilizers try to solve the problem of:

recognition lags and implementation lags.

Countercyclical fiscal policy attempts to:

smooth out expansions and recessions in the business cycle.

Supply-side fiscal policy initiatives take a long time to shift the aggregate supply curve to the right. As a result:

supply-side proposals are generally emphasized as long-run solutions to growth problems.

Supply-side fiscal policy:

takes time to affect aggregate supply.

Considering all U.S. taxpayers, average tax revenue (adjusted for both inflation and the number of returns) went from $6,954 to $6,202 between 1980 and 1991. Many analysts point to these figures and claim them as proof that:

the Laffer curve does not exist.

If current savings increases the same amount as the federal stimulus:

the effects of the stimulus are negated.

Contractionary fiscal policy occurs when:

the government decreases spending or increases taxes to slow economic expansion

If the unemployment rate falls below the natural rate of unemployment (u*):

the government will want to conduct contractionary fiscal policy.

The x axis for the Laffer curve represents:

the tax rate

The y axis for the Laffer curve represents:

the tax revenue.

If lags cause the effects of fiscal policy to be delayed for a long period of time:

there is a risk that the policy can actually magnify the business cycle.

Recognition lag, implementation lag, and impact lag are all examples of:

time lags that accompany policy decisions.

Three issues that arise in the application of activist fiscal policy are:

time lags, crowding-out, and savings shifts.

Congress and the president would conduct contractionary fiscal policy in order to:

try to control inflation

Congress and the president would conduct expansionary fiscal policy in order to:

try to stimulate the economy toward expansion.

Which of the following function as an automatic stabilizer during business cycles?

unemployment compensation

Countercyclical fiscal policy consists of:

using expansionary fiscal policy during times of recession and contractionary fiscal policy during times of expansion.

In a bid to be re-elected, you promise both a lower tax rate and greater tax revenue. Would you be able to back up this promise with economic reasoning? Use the Laffer curve, shown here, to support your answer.

Yes, but only if the current tax rate is in Region II of the Laffer curve.

From 2001 to 2002 and 2007 to 2009, the U.S. government was likely to engage in _______ fiscal policy, which would cause aggregate demand to _______.

expansionary; increase

In 2001, the U.S. government engaged in _________ fiscal policy, and from 2003 to 2007, the government engaged in _________ fiscal policy.

expansionary; no

During a recession, the government spends $100 million to stimulate the economy. If the marginal propensity to consume is 0.8, what will be the potential increase in income in the economy as a result of the government's increase in the spending level?

$500 million

The graph below shows initial equilibrium in the loanable funds market at $800 million and an interest rate of 4%, point A. Now assume that the government increases spending by $100 million that is entirely deficit-financed. The new equilibrium in the loanable funds market is now $840 million and an interest rate of 5%, point B.

$840; $740; $100; $40

For each of the following fiscal policy proposals, determine whether the primary focus is on aggregate demand or aggregate supply or both: i. $1,000 per person tax reduction ii. a 5% reduction in all tax rates iii. Pell Grants, which are government subsidies for college education iv. government-sponsored prizes for new scientific discoveries v. an increase in unemployment compensation

(i) demand-side; (ii) both; (iii) supply-side; (iv) supply-side; (v) both

If your income increases by $1,500 and you only consume $900 of it, your marginal propensity to consume would be equal to:

0.60

If an initial increase in government spending of $100 billion leads to a total increase of $400 billion in income, the marginal propensity to consume in the economy is:

0.75

If the spending multiplier is 5, what is the marginal propensity to consume in the economy?

0.8

Assume the economy is operating below its full employment equilibrium by $100 billion. If the recessionary gap is closed with $25 billion in tax cuts, what is the spending multiplier?

5

Which of the following lags associated with fiscal policy are expected to be alleviated by automatic stabilizers such as unemployment benefits?

Both A and B; (recognition lags and implementation lags)

Why would a government want to use expansionary fiscal policy to help stimulate aggregate demand if, in the long run, we would expect prices to adjust and the economy to return to its long-run equilibrium on its own?

It could take a long time for prices to adjust by market forces alone.

___________ is an example of an automatic stabilizer.

Unemployment compensation

An initial increase in government spending of $100 billion can create more than $100 billion through what economists call:

a multiplier effect.

As part of the Economic Stimulus Act of 2008, the typical family of four received:

a rebate check for $1,800.

According to the new classical critique of fiscal policy, an increase in government spending today will lead to _____________ in current savings.

an increase

It is difficult to determine when the economy is turning up or down. This is because there is ___________ that delays the effects of changes in fiscal policy.

an time lag

The Laffer curve is:

an illustration of the relationship between tax rates and tax revenues.

It takes time for the complete effects of monetary and fiscal policy to materialize. This is because there is ___________ between setting fiscal policy and seeing its effects.

an impact lag

Consider the Economic Stimulus Act. What would have caused real GDP to remain negative through the first half of 2009?

b and c

The use of government spending and taxes to influence the economy is:

called fiscal policy.

The use of the money supply to influence the economy is:

called monetary policy.

If the economy starting at full-employment output begins to enter into an expansion, one would expect Congress and the president to conduct:

contractionary fiscal policy

When the government decreases spending or increases taxes to slow economic expansion, the government is conducting:

contractionary fiscal policy.

Fiscal policy that seeks to counteract business-cycle fluctuations is:

countercyclical fiscal policy

Lowering marginal income tax rates for individuals:

creates incentives for individuals to work harder and produce more.

Lower income tax rates will affect

either AD or LRAS (or both).

Assume the economy is operating beyond its full employment equilibrium and has an inflationary gap of $100 billion. Which of the following policy options would restore the economy to its full employment equilibrium if the nation's marginal savings rate is 20%.

decrease government spending by $20 billion.

The new classical critique of activist fiscal policy is theoretically different from the crowding-out critique. Crowding-out occurs when private spending __________ in response to government spending. Under the new classical critique, increased government spending leads people to __________ their current savings in order to help pay for higher taxes in the future, which increases the __________ of loanable funds.

decreases; increase; supply

When the government borrows, the ___________ loanable funds shifts to the right, causing the interest rate to ___________, which causes private investment to ___________.

demand for; rise; fall

If an economy is experiencing an unemployment rate less than the natural rate, which of the fiscal policies would you suggest in order to restore the economy to full employment?

either A or B (increase taxes; decrease government spending)

A marginal tax rate of 91% means that:

for each additional dollar earned, only 9 cents can be used toward consumption.

At ___________ tax rates, ___________ in those tax rates lead to ___________ in total tax revenue.

high; decreases; increases

Lower corporate profit tax rates:

increase the incentives for corporations to undertake activities that generate more profit.

At ___________ tax rates, ___________ in those tax rates lead to ___________ in total tax revenue.

low; decreases; decreases low; increases; increases high; decreases; increases

An example of expansionary fiscal policy is:

lowering taxes.

The portion of additional income that is spent on consumption is:

marginal propensity to consume (MPC).

When the economy falters, people often look to the government to help push the economy forward again. In fact, the government uses many different tools to try to affect the economy. Economists classify these tools on the basis of two different types of policy:

monetary policy and fiscal policy.

All else being equal, people generally prefer __________ in their financial affairs.

smoothness and predictability

Income tax revenue is calculated by:

tax rate mc111-1.jpg income.

The Economic Stimulus Act of 2008 focused on _________, whereas the American Recovery and Reinvestment Act of 2009 focused on _________.

taxes; government spending

One argument for tax cuts when the government is running a budget deficit is:

that lower marginal tax rates will incentivize people to work and thus increase the overall tax revenue.

An illustration of the relationship between tax rates and tax revenues is called:

the Laffer curve.

A government might want to reduce aggregate demand if it believes that:

the economy is expanding past its long-run capabilities

Assume that the government is currently balancing the national budget so that outlays equal tax revenue. Then the economy starts into an expansion, and the government decides to decrease government spending by $50 billion. As a result:

the federal budget will be in surplus by at least $50 billion.

An example of the multiplier effect is when:

the government increases government spending initially by $100 billion, and total income in the economy increases by more than $100 billion.

Expansionary fiscal policy occurs when:

the government increases spending or decreases taxes to stimulate the economy toward expansion.

Which of the following is caused by supply-side fiscal policy, but not by demand-side fiscal policy?

the level of full-employment output.

The assertion that increases in government spending and decreases in taxes are largely offset by increases in savings is called:

the new classical critique.

Marginal propensity to consume is:

the portion of additional income that is spent on consumption.

Fiscal policy is:

the use of government spending and taxes to influence the economy.

Assume that the government is currently balancing the national budget so that outlays equal tax revenue. Then the economy slips into recession, and the government decides to increase government spending by $50 billion. The government must pay for this by borrowing; it must sell $50 billion worth of Treasury bonds. As a result:

the use of the money supply to influence the economy.

Monetary policy is:

the use of the money supply to influence the economy.

When aggregate demand is low enough to drive unemployment above the natural rate:

there is downward pressure on the price level and the government may want to conduct expansionary fiscal policy.

When aggregate demand is high enough to drive unemployment below the natural rate:

there is upward pressure on the price level and the government may want to conduct contractionary fiscal policy

During which of the following situations would you advise for expansionary fiscal policy?

when the current unemployment rate is above the natural rate of unemployment

An increase in taxes or a decrease in spending during an economic expansion can:

work to decrease the budget deficit and pay off some of the government debt.