Economics - Ch. 11

Other things equal, an increase in government spending will have what effect on an economy's aggregate demand curve?

Cause it to shift out rightward.

Which one of the following correctly describes the relationship between the multiplier, the AD shortfall, and the desired fiscal stimulus?

Desired Fiscal Stimulus = AD Shortfall/Multiplier

The relationship between AD excess, the multiplier, and the desired fiscal restraint is given by

Desired fiscal restraint = AD excess / Multiplier

A cut in transfer payments increases the disposable income of recipients.

False

Which one of the following fiscal policy "packages" likely produces the most stimulus to the economy?

Higher government purchases, higher transfers, lower taxes.

An increase in taxes restrains the economic expansion because they reduce what?

Household and business spending

The macroeconomic policies favored by the Trump administration are _____ in nature.

Keynesian

The initial fiscal stimulus resulting from an increase in transfer payments is equal to the transfer payment times the _______

MPC

The government can reduce taxes to shift the aggregate demand curve in which direction?

Right

Government can use which one of the following to reduce total consumption?

Tax increases

Which of the following is a potential flaw of fiscal policy?

The crowding-out effect

True or false: The multiplier effect influences government spending as it does investment.

True

Pork barrel politics stems from the fact that tax and spending initiatives are designed and implemented by the

U.S. Congress.

The federal government's ability to tax incomes originated with

a 20th century amendment to the constitution.

Presidents Obama and Trump have shown ______ Keynesian policies.

a preference for

All else equal, real GDP tends to fall when there is a decrease in

aggregate demand

The amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes is the

aggregate demand shortfall

Budget cuts should _______ the size of the desired fiscal restraint to achieve the targeted reduction in aggregate demand.

be less than

The ______-out effect is a potential flaw or result of expansionary fiscal policy.

crowding

Government may choose to combine spending decreases and tax increases in order to ______ (increase/decrease) aggregate demand and check inflation.

decrease

When all else is constant, a decrease in aggregate demand causes real GDP to _______ (increase/decrease).

decrease

During a recession, the government can ______ taxes to increase consumption and shift the aggregate demand curve to the _____.

decrease, right

Government spending directly impacts aggregate _______ (supply/demand).

demand

To compute the desired fiscal restraint, we first determine the size of the AD ______, that is, how far we want to shift the AD curve to the left.

excess

True or false: Assuming an upward-sloping AS curve, when the AD curve shifts rightward, price levels fall ______.

false

Interest-sensitive consumption and investment are potentially crowded out as a result of expansionary ______ (monetary/fiscal) policy.

fiscal

Specifying the amount of desired AD shift and specifying the policy tools needed to induce this shift are steps required to formulate ______ policy.

fiscal

The use of government taxes and spending to alter macroeconomic outcomes is referred to as _______ policy.

fiscal

Typically, there is a significant time lag between the recognition of the need for ______ action and the time action is taken.

fiscal

Aggregate demand includes ______.

government purchases but not income transfers

Aggregate demand is directly affected by:

government spending

A rightward AD shift _______ the real GDP gap will take the economy to full-employment GDP.

greater than

To close a recessionary gap, assuming an upward-sloping AS curve, the rightward shift in AD must be ______.

greater than the recessionary gap

Social Security, welfare, and unemployment benefits are considered to be ______.

income transfers

When the AD curve shifts to the right, the economy moves up along the upward-sloping AS curve, causing price levels to ______.

increase

The government may reduce government spending or increase taxes in order to eliminate a(n)______.

inflationary GDP gap

Assuming an upward-sloping AS curve, to eliminate a recessionary gap, the increase in AD must be _______(larger/smaller) than the size of the gap.

larger

To have the same impact on aggregate demand as a $100 billion increase in government spending, a tax cut would need to be ______.

larger than $100 billion

When an economy's output is _______ than its full-employment output, the economy is in a recessionary gap.

less

A tax cut must be ______ (more/less) than a proposed increase in government spending to achieve the same amount of shift in the aggregate demand curve.

more

Government spending is subject to the ______ effect.

multiplier

The multiple by which an initial change in aggregate spending will alter total expenditure after an infinite number of spending cycles is the

multiplier

Income taxes make up what percent of tax revenues?

one half

When the government spends on defense it is a government ________. A government payment to individuals for which no current goods or services are exchanged is a(n) _______.

purchase, income transfer

An economy producing below full-employment output is considered to be operating in a(n) ______.

recessionary gap

When policymakers become concerned about worsening inflation, they are likely to pursue fiscal

restraint

Other things equal, an increase in government spending will shift an economy's aggregate demand curve to the _____ (left/right).

right

Increased transfer payments do not increase injections in a "dollar-for-dollar" manner because consumers

save some of the additional transfer payments

A rightward AD shift equal to the real GDP gap will leave the economy ______.

short of full-employment GDP

The amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes is the aggregate demand _______.

shortfall

The ______ (smaller/larger) the MPC, the greater the tax cut needed to induce a specific increase in consumption.

smaller

The influence on initial consumption caused by a cut in transfer payments is affected by the MPC just like a

tax hike

The largest source of revenue for the federal government is

the personal income tax

There will typically be a significant time lag between

the recognition that fiscal policy is needed and the time action is taken.

Politics is sometimes referred to as being "pork barrel" in nature because politicians often put

their reelection plans above the needs of the economy.

Unemployment compensation and welfare payments are examples of _______ payments.

transfer

What is the initial change in consumption if an economy's MPC is 0.75 and there is a reduction in taxes of $6 billion?

$4.5 billion Reason: ($6b x 0.75) = $4.5 billion initial change in consumption

When the MPC = 0.75, the desired tax cut for achieving a $300 billion fiscal stimulus is _____.

$400 billion Desired tax cut = Desired fiscal stimulus ÷ MPC = $300 billion/0.75 = $400 billion.

If there is a $500b tax cut and the MPC = 0.80, the initial increase in consumption would be:

$400b

If government spending is $10b and the multiplier is 4, how much total change in spending can we expect?

$40b Reason: $10b x 4 = $40b

The federal government collects approximately ___ in tax revenue each year.

$5 trillion

To achieve a $500 billion increase in total spending when the MPC = 0.8, the desired tax cut must be ______.

$625 billion Reason: Desired tax cut = Desired fiscal stimulus/MPC = $500 billion/0.8 = $625 billion.

Which of the following are tools of fiscal policy? Select all that apply. - Changes in the supply of money - Changes in foreign policy - Changes in tax rates - Changes in income transfers - Government purchases

- Changes in tax rates - Changes in income transfers - Government purchases

Which of the following are fiscal tools that government may use to eliminate an inflationary GDP gap? Select all that apply. - Decrease government spending - Use a combination of both decreased government spending and raised taxes. - Increase taxes - Decrease taxes - Increase government spending - Use a combination of both increased government spending and decreased taxes

- Decrease government spending - Use a combination of both decreased government spending and raised taxes - Increase taxes

All else equal, which of the following are potentially crowded out as a result of expansionary fiscal policy? Select all that apply. - Interest-sensitive consumption - Government spending - Exports - Investment

- Interest-sensitive consumption - Investment

Which of the following are tools of fiscal policy used to positively stimulate the economy? - Decreases in government spending - Tax reductions - Tax increases - A combination of both decreasing government spending and increasing taxes - Increases in government spending

- Tax reductions - Increases in government spending

The two steps required to formulate fiscal policy are ______. - select the monetary policy tools needed to induce the desired shift - specify the amount of the desired AD shift - select the fiscal policy tools needed to induce the desired shift

- specify the amount of the desired AD shift - select the fiscal policy tools needed to induce the desired shift

If the AD shortfall is $100 billion and the multiplier is 5, $_____ billion is the desired change in government spending.

20

Suppose the economy faces an AD excess of $800 billion. If the multiplier is 4, then the desired fiscal restraint is $______ billion.

200

If the MPC is 0.8, the value of the multiplier is ______.

5

If government spending was increased by $10b and the cumulative change in spending (AD) was $60 billion, then the value of the multiplier is _____.

6

If the government seeks an initial increase in consumption of $420 billion and the economy's MPC is 0.6, then a tax cut of $_______ billion is needed.

700