ECON CHAPTER 16

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Suppose the economy is in short run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the basic ADminus−AS model in the​ diagram, this would be depicted as a movement from

A to E.

Refer to the diagram. An increase in taxes would be depicted as a movement from​ _______, using the basic ADminus−AS model.

B to A

Which of the following is considered contractionary fiscal​ policy?

Congress increases the income tax rate

Which of the following is a reason why we should consider the federal national debt a​ problem?

If the debt drives up interest​ rates, crowding out will occur.

​________ and​ ________ are the largest sources of revenue collected by the federal government.

Individual income​ taxes; social insurance taxes

If the federal​ government's expenditures are less than its tax​ revenues, then

a budget surplus results.

In the long​ run, most economists agree that a permanent increase in government spending leads to

a decrease in private spending by the same amount that government spending increased.

Suppose the government spending multiplier is 2. The federal government cuts spending by​ $40 billion. What is the change in GDP if the price level is not held​ constant?

a decrease of less than​ $80 billion

Fiscal policy actions that are intended to have longminus−run effects on real GDP attempt to increase​ ________ through changing​ ________.

aggregate​ supply; taxes

If real GDP exceeded potential real GDP and inflation was​ increasing, which of the following would be an appropriate fiscal​ policy?

an increase in taxes

The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of

automatic stabilizers.

The aggregate demand curve will shift to the left​ ________ the initial decrease in government purchases.

by more than

Expansionary fiscal policy

can be effective in the short run.

From an initial​ long-run equilibrium, if aggregate demand grows more slowly than​ long-run and​ short-run aggregate​ supply, then Congress and the president would most likely

decrease taxes.

The tax multiplier equals the change in​ ________ divided by the change in​ ________.

equilibrium real​ GDP; taxes

In the dynamic model of ADminus−AS in the figure to the​ right, if the economy is at point A in year 1 and is expected to go to point B in year​ 2, Congress and the president would most likely pursue

expansionary fiscal policy.

Congress and the president carry out fiscal policy through changes in

government purchases and taxes.

Which of the following is an objective of fiscal​ policy?

high rates of economic growth

The multiplier effect refers to the series of

induced increases in consumption spending that result from an initial increase in autonomous expenditures.

If government purchases increase by​ $100 billion and lead to an ultimate increase in aggregate demand as shown in the graph to the​ right, the difference in real GDP between point A and point B will be

more than​ $100 billion.

Consider the hypothetical information in the table for potential real​ GDP, real​ GDP, and the price level in 2018 and in 2019 if Congress and the president do not use fiscal policy. If Congress and the president use fiscal policy successfully to keep real GDP at its potential level in​ 2019, which of the following will be lower than if Congress and the president had taken no​ action?

real GDP and the inflation rate

Which of the following is an example of discretionary fiscal​ policy?

the tax cuts passed by Congress in 2001 to combat the recession

In the dynamic model of ADminus−AS in the diagram to the​ right, if the economy is at point A in year 1 and is expected to go to point B in year​ 2, and no fiscal or monetary policy is​ pursued, then at point B

the unemployment rate is very low.

Which of the following is the largest category of federal government​ expenditures?

transfer payments

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be​ ________ and real GDP to be​ ________.

​higher; higher

A recession tends to cause the federal budget deficit to​ ________ because tax revenues​ ________ and government spending on transfer payments​ _________.

​increase; fall; rise

A reduction in the corporate tax rate to 20 percent would​ ________ the return corporations receive from new investments in equipment and​ factories, and this would​ ________ aggregate supply.

​increase; increase

It is​ ________ difficult to effectively time fiscal policy than monetary policy because​ ________.

​more; fiscal policy takes longer to implement


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