Fiscal Policy
The effect of a government deficit on the economy is:
expansionary
If legislation were introduced to require the budget to be balanced at all times:
fiscal policy could not operate as an automatic stabilizer of the business cycle.
Government tax revenue rises and falls with the business cycle as:
An automatic stabilizer
If the economy is at equilibrium below potential output, there is a(n: A. inflationary gap, and contractionary fiscal policy is appropriate B. Recessionary gap, and contractionary fiscal policy is apporpriate C. inflationary gap, and expansionary fiscal policy is appropriate D. recessionary gap, and expansionary fiscal policy is appropriate
D. Recessionary gap, and expansionary fiscal policy is appropriate
To close an inflationary gap by employing fiscal policy, the government could: A. Raise the average amount awarded for a disability pension B. Increase federal subsidies to state universities C. Lower the corporate income tax rate D. Reduce budget allocations to interstate highway maintenance
D. reduce budget allocations to interstate highway maintenance.
If government transfer payments rise by $100 billion, and this increases real GDP by $120 billion, then we can conclude that the multiplier for government transfers is:
Greater than one
Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $850 billion, which policy would bring the economy to potential output?
Increase taxes by $12.5 billion.
Suppose that the marginal propensity to consume is 0.75. If government spending for goods and services increases by $30 billion, what will be the total effect on real GDP?
It will increase by $120 billion.
The budget balance is calculated as:
T - G - TR.
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, which measures a recessionary gap?
Y2 - Y1
The difference between a budget deficit and government debt is that:
a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the amount the government owes
Temporary tax cuts enacted by Congress to fight a recession are considered to be:
a discretionary fiscal policy intended to be expansionary.
Spending promises made by governments that are effectively a debt, despite the fact that they are not included in the usual debt statistics, are known as:
implicit liabilities
If the marginal propensity to consume is 0.75 and transfer payments increase by $30 billion, real GDP will:
increase by less than $120 billion.
(Figure: Fiscal Policy Options) According to the Figure: Fiscal Policy Options, if the aggregate demand curve is AD′, which is the most appropriate fiscal policy?
increase government spending and decrease income tax rates.
Which fiscal policy would make a budget surplus larger or a budget deficit smaller?
lower government transfers
All else equal, when the unemployment rate decreases, the budget:
surplus gets larger or the budget deficit gets smaller.
Suppose that the budget deficit of a country remains level for five years. Which is true concerning the fiscal stance of this government?
the federal debt will rise
Which is NOT a method of fiscal policy? A. Changing tax rates B. Government purchases of goods and services C. Changes in the money supply D. Government transfer
C. Changes in the money supply
Which represents the largest source of tax revenue for the US Federal government? A. Social insurance taxes B. Corporate profit taxes C. Personal income taxes D. Sales taxes
C. Personal Income Taxes
Suppose the economy is operating at an output level of $5400 billion. Assume furthermore that potential output is $5000. Which would be necessary to close this inflationary gap if the marginal propensity to consume is 0.75?
Decrease spending by $100 billion.
