Econ ch16

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Expansionary fiscal policy has a​ ________ multiplier effect on equilibrium real​ GDP, and contractionary fiscal policy has a​ ________ multiplier effect on equilibrium real GDP

positive; negative

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)_____fiscal policy If the​ government's policy is​ successful, what is the effect of the policy on the following macroeconomic​ indicators? Actual real GDP? Potential real GDP? Price level? Unemployment?

Contractionary decreases does not change decreases increases

Crowding out refers to

the decline in private expenditures that result from an increase in government purchases

Which of the following are categories of federal government​ expenditures

All of the above

Which of these fiscal policy actions will increase real GDP in the short run

An increase in government expenditures

Which of these is an example of an automatic stabilizer

An unemployment benefit program

Which of these statements about the federal debt is correct

At some point, the government may have to raise taxes or cut spending to pay interest on the debt

According to the graph, if the solid line represents the GDP without policy and the dotted line includes policy, which side shows an ill-timed stabilization policy

B

Consider the figures below. Determine which combination of fiscal policies shifted AD1 to AD2 in each figure and returned the economy to​ long-run macroeconomic equilibrium

Example​ (A): Expansionary fiscal policy. Example​ (B): Contractionary fiscal policy.

Suppose the economy is in equilibrium in the first period at point​ (A). In the second​ period, the economy reaches point​ (B). We would expect the federal government to pursue what type of policy in order to move AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium​ (point C) in the second​ period If the​ government's policy is​ successful, what is the effect of the policy on the following macroeconomic​ indicators? Actual real GDP? Potential real GDP? Price level? Unemployment?

Expansionary fiscal policy increases does not change increases decreases

What is the difference between federal government purchases​ (spending) and federal government​ expenditures

Government purchases are included in government expenditures

Which type of fiscal policy would cause the move of the AD curve represented in this graph

Higher government spending

Which of the following statements about the federal debt is​ correct

If the debt becomes very large relative to the​ economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt

Which of these are the largest sources of federal government revenues

Individual income taxes and social security withholdings

What is the​ long-run effect of a permanent increase in government​ spending

The decline in​ investment, consumption, and net exports exactly offsets the increase in government​ spending; therefore, real GDP remains unchanged

Which of these statements is true about using fiscal policy to stabilize the economy

The delay caused by the legislative process is typically longer for fiscal policy than for monetary policy

Which of these is the main reason for the long-run funding problems of Social Security

The number of workers per retiree continues to decline

Countries with a higher marginal propensity to import ​(MPI​) will have smaller multipliers than countries with a lower marginal propensity to import

True

Few economists believe the federal government should attempt to balance its budget every year

True

The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates

True

If the government cuts taxes in order to increase aggregate​ demand, the action is called

a discretionary fiscal policy

The effect on the economy of tax reduction and simplification is

an increase in the quantity of real GDP supplied at every price​ level, and a shift in the​ long-run aggregate supply curve

Changes in taxes and spending that happen without actions by the government are called

automatic stabilizers

Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called __________

automatic stabilizers

Every time the federal government runs a budget deficit, the Treasury must

borrow funds from savers by selling U.S. Treasury securities

An attempt to reduce inflation requires​ _____________ fiscal​ policy, which causes real GDP to​ _________ and the price level to​ __________

contractionary; fall; fall

The decline in private expenditures that results from an increase in government purchases is known as

crowding out

All the programs that Congress authorizes on an annual basis, which are not automatically funded by the prior laws passed by Congress, are called __________

discretionary spending

The tax multiplier equals the change in

equilibrium GDP divided by the change in taxes

The American Recovery and Reinvestment Act of 2009 is a clear example of

expansionary fiscal policy

Government policies that increase aggregate demand are called __________

expansionary policies

Changes in the federal tax rate or changes in government spending designed to achieve some macroeconomic policy objective are known as

fiscal policy

Budget deficits automatically __________ during recessions and __________ during expansions

increase, decrease

According to the​ crowding-out effect, if the federal government increases​ spending, the demand for money and the equilibrium interest rate will​ ___________, which will cause​ consumption, investment, and net exports to​ ___________

increase; decrease

Budget deficits automatically​ __________ during recessions and​ __________ during expansions.

increase; decrease

Between the beginning of 2009 and the end of​ 2010, real GDP​ ________, while employment​ ________

increased by 4.0​ percent; declined by 3.3 million

Over​ time, potential GDP​ ________, which is shown by the​ ________ curve shifting to the right

increases; long-run aggregate supply

The cyclically adjusted budget deficit

is measured as if the economy were at potential real GDP

We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier

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 is called

supply-side economics

Which of the following is the formula for the government purchases​ multiplier

1/ 1−MPC

Decreasing the tax rate decreases the value of the government purchases multiplier

False

When the tax rate increases, the size of the multiplier effect

decreases WHY? - The higher the tax rate, the smaller the amount of any increase in income that households have available to spend, which in turn reduces the size of the multiplier effect.

What are the gains to be had from simplifying the tax​ code

-Greater clarity of the decisions made by households and firms. -Increased efficiency of households and firms. -Resources from the tax preparation industry freed up for other endeavors

About​ ________ of the American Recovery and Reinvestment Act stimulus package took the form of increases in government​ expenditures, and about​ ________ took the form of tax cuts

two-thirds; one-third

When is it considered​ "good policy" for the government to run a budget​ deficit

When borrowing is used for​ long-lived capital goods

Which of the following is the formula for the tax​ multiplier

−MPC/ 1−MPC

The balanced budget multiplier is always equal to 1.

True

Which of the following formulas represents the expression for equilibrium real​ GDP

Y =C-(MPC)+I+G/ 1-MPC

The goal of expansionary fiscal policy is

to increase aggregate demand.

A simplified tax code would reduce economic efficiency by increasing the number of decisions households and firms make solely to reduce their tax payments

False

The higher the tax​ rate, the larger the multiplier effect.

False

Suppose the economy is in equilibrium in the first period at point​ (A). In the second​ period, the economy reaches point​ (B). What policy would the federal government likely pursue in order to move AD 2AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium​ (point C) in the second​ period?

Increase government spending

Which of these would be a fiscal policy the government might want to use if the economy is operating at too high a level of output

Increasing income tax rates

Consider the figure to the right. An increase in government spending shifted the aggregate demand curve from AD1 to AD2. As a​ result, both price level and real GDP increased. What can be​ said, however, about the increase in real​ GDP

It increased by less than indicated by a multiplier with a constant price level.

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

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

Increased government debt can lead to higher interest rates​ and, as a​ result, crowding out of private investment spending. In terms of borrowing​ (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the​ economy?

-Debt-spending on education. -Debt-spending on research and development. -Debt-spending on highways and ports

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

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

Recession: action decrease taxes.. result price level rise Rising Inflation: action decrease gov purchases.. result price level falls

Does government spending ever reduce private​ spending

Yes, due to crowding out

If the federal government's expenditures are less than its revenue, there is a __________

budget surplus

Economists use the term fiscal policy to refer to changes in taxing and spending policies

only by the federal government

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

When the economy is in a recession, the government can

increase government purchases or decrease taxes in order to increase aggregate demand

If a tax cut has​ supply-side effects, then

it will affect both aggregate demand and aggregate supply.

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 percent of federal government expenditures

As a result of crowding out in the short​ run, the effect on real GDP of an increase in government spending is often

less than the increase in government spending.

From an understanding of the multiplier​ process, explain why an increase in the tax rate would decrease the size of the government purchases multiplier. The value of the government purchases multiplier would decrease because in the formula for the multiplier Similarly, explain why a decrease in the marginal propensity to import would increase the size of the government purchases multiplier. The value of the government purchases multiplier would decrease because in the formula for the multiplier the denominator is

the MPC is multiplied by​ (1− ​t) 1− ​[MPC×​(1 −​t) − ​MPI]

Economists believe that the smaller the tax wedge for any economic​ activity, such as​ working, saving,​ investing, or starting a​ business,

the more of that economic activity that will occur

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

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

transfer payments


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