econ chapter 13
The Council of Economic Advisers (CEA) advises the president on
economic matters and provides recommendations for discretionary fiscal policy action.
In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Which of the following is true?
There is a crowding-out effect of $20 billion.
The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand but also at the same time raising taxes to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is:
a mediocre and contradictory combination of tax and expenditure changes.
Assume that a hypothetical economy with an MPC of 0.8 is experiencing a severe recession. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? b. How large a tax cut would be needed to achieve the same increase in aggregate demand? c. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt.
a. 5 billion b. 6.25 c. 25 billion 25 billion
a. What are the two ways to measure the public debt? b. The distinction between the absolute and relative sizes of the public debt is important because c. Refinancing the public debt means d. An internally held debt is one in which the e. Paying off an internally held debt would f. Paying off an externally held debt
a. Its absolute dollar size and its relative size as a percentage of GDP. b. the absolute size doesn't tell you about an economy's capacity to repay the debt. c. selling new bonds to retire maturing bonds. d. bondholders live in the nation having the debt. e. not burden the economy as a whole. f. may lower the dollar exchange rate.
True or false? a. The total public debt is more relevant to an economy than the public debt as a percentage of GDP: b. An internally held public debt is like a debt of the left hand owed to the right hand: c. The portion of the U.S. debt held by the public (and not by government entities) was larger as a percentage of GDP in 2015 than it was in 2000: d. As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced industrial nations:
a. false b. true c. true d. false
a. The cyclically adjusted budget measures what the federal deficit or surplus would be if the economy reached the (Click to select) full-employment normal actual equilibrium level of GDP. b. If the cyclically adjusted budget is balanced, c. Suppose the full-employment, noninflationary level of real output is GDP3 (not GDP2) in the economy depicted in the figure below. If the economy is operating at GDP2, instead of GDP3, the current fiscal policy is d. To move the economy to full employment, the government should
a. full-employment b. the government is not engaging in either expansionary or contractionary policy. c. contractionary, since a surplus would exist. d. cut taxes or increase spending.
a. Refinancing of the public debt might drive up real interest rates because b. Refinancing of the public debt might cause c. If public investment financed through borrowing complements private investment,
a. government borrowing to finance the debt increases demand for funds and competes with private borrowing. b. higher interest rates, which can lower investment and economic growth. c. private borrowers may be willing to pay higher interest rates associated with financing the public debt.
a. The problem of time lags in enacting and applying fiscal policy is that b. A political business cycle is the concept that c. Expectations of a near-term policy reversal weaken fiscal policy because d. The crowding-out effect is e. Consider the following statement: "Although fiscal policy clearly is useful in combating the extremes of severe recession and demand-pull inflation, it is impossible to use fiscal policy to fine-tune the economy to the full-employment, noninflationary level of real GDP and keep the economy there indefinitely." This statement recognizes that
a. in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed. b. politicians are more interested in re-election than in stabilizing the economy. c. consumers may hesitate to increase their spending because they believe that tax rates will rise again. d. the reduction in investment spending caused by the increase in interest rates arising from an increase in government spending. e. the impact of fiscal policy will affect the economy differently depending on the timing of the policy and the severity of the situation
a. Social Security and Medicare are "pay-as-you-go" plans. This means that b. Social Security and Medicare trust funds are c. Social Security and Medicare trust funds are projected to be depleted by d. The key long-run problem of both Social Security and Medicare is the
a. most of the current revenues from the Social Security tax are paid to current Social Security retirees. b. assets held by these programs to help pay for future projected tax revenue shortfalls. c. 2033 and 2024, respectively d. aging population and the age distribution of the U.S. population
Match each of the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. a. To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental impact statement for each new project will take at least two years to complete before any building can begin. b. Distracted by a war that is going badly, inflation reaches 8 percent before politicians take notice. c. A sudden recession is recognized by politicians, but it takes many months of political deal-making before a stimulus bill is finally approved. d. To fight a recession, the president orders federal agencies to get rid of petty regulations that burden private businesses—but the federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.
a. operational lag b. recognition lag c. administravtive lag d. operational lag
Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap. a. Given that full employment exists at $4,500, does a recessionary gap or an inflationary gap exist? b. Identify this gap in the diagram below. c. What is the dollar amount of the expenditure gap?
a. recessionary gap b. c. 1000
a) The government's fiscal policy options for ending severe demand-pull inflation include b. For a person who wants to preserve the size of government, the fiscal options for ending severe demand-pull inflation would include c. For a person who thinks the public sector is too large, the fiscal options for ending severe demand-pull inflation would include d. The "ratchet effect" makes anti-inflationary policy
a. reducing government spending, increasing taxes, or both. b. an increase in taxes c. a cut in government spending. d. more difficult
a. Built-in (or automatic) stabilizers work by changing ______ so that changes in GDP are reduced. b. What type of tax system would have the most built-in stability?
a. taxes and government payouts b. A progressive tax because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes.
Some politicians have suggested that the United States enact a constitutional amendment requiring that the federal government balance its budget annually. Such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession. This is because when the economy enters a recession,
net tax revenue falls and transfer payments rise. Balancing the budget would require lowering transfer payments and raising taxes
If the annual interest payments on the debt sharply increased as a percentage of GDP,
the government would have to use tax revenues or go deeper into debt
During the recession of 2007−2009, the U.S. federal government's tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?
yes
