Fiscal Policy

An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the government raise taxes to achieve its objective?

$12 billion

In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPS is 0.4, then it could increase government spending by:

$20 billion

A contractionary fiscal policy is shown as a

left ward shift in the economy's aggregate demand curve

The amount by which the federal tax revenues exceed federal government expenditures during a particular year is the

budget surplus

The U.S. public debt:

consists of the historical accumulation of all past federal deficits and surpluses

The crowding-out effect suggests that

government borrowing to finance the public debt increases the real interest rate and reduces private investment

Suppose the federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government's public debt would have:

increased by $20 billion

An economist who favored expanded government would recommend

increases in government spending during recession and tax increases during inflation

The crowding-out effect of expansionary fiscal policy suggests that:

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment

If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by

increasing government spending by $4 billion

If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by

increasing taxes by $20 billion

Discretionary fiscal policy refers to

intentional changes in taxes and government expenditures made by Congress to stabilize the economy

Contractionary fiscal policy is so named because it

is aimed at reducing aggregate demand and thus achieving price stability

Expansionary fiscal policy is so named because it

is designed to expand real GDP

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should:

reduce tax rates and/or increase government spending

An expansionary fiscal policy is shown as a

rightward shift in the economy's aggregate demand curve

The federal budget deficit is found by

subtracting government tax revenue from government spending in a particular year

Determining the location of the economy on the Laffer Curve is important in assessing tax policy because

tax rates should rise below the maximum and after the maximum

Assume the economy is at full employment and that investment spending declines dramatically. if the goal is to restore full employment, government fiscal policy should be directed toward

an excess of government expenditures over tax receipts

The Laffer Curve illustrates that

at some tax rate 0% and 100%, tax revenues are maximized.

Fiscal policy refers to the

deliberate changes in government spending and taxes to stabilize domestic output, employment, and price level

The group of three economists appointed by the president to provide fiscal policy recommendations is the

Council of Economic Advisers

Expansionary fiscal policy is so named because it involves an expansion of the nations money supply.

FALSE

Fiscal Policy is mainly undertaken by the Federal Reserve

FALSE

What are the two ways to measure the public debt?

Its absolute dollar size and as a percentage of GDP

The public debt is the accumulation of all deficits and surpluses that have occurred through time.

True

Which of the following fiscal policy changes would be the most contractionary?

a $10 billion increase in taxes and a $30 billion cut in government spending

Which of the following represents the most contractionary fiscal policy

a $30 billion decrease in government spending

An appropriate fiscal policy for severe recession is

a decrease in tax rates

Suppose that a country has no public debt in year 1 but experiences a budget deficit of $40 billion in year 2, a budget deficit of $20 billion in year 3, a budget surplus of $10 billion in year 4, and a budget deficit of $2 billion in year 5 a) what is the absolute size of its public debt in year 5? b) If its real GDP in year 5 is $104 billion, what is this country's public debt percentage of real GDP in year 5?

a) $-52 billion b)50%

Assume that a hypothetical economy with an MPC of 0.9 is experiencing a severe recession. a) By how much would government spending have to rise to shift the aggregate demand curve rightward by $30 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? b) Determine one possible combination of government spending increases and tax increases that would accomplish the same goal with out changing the amount outstanding debt.

a) $3 billion $3.33 billion b) Increase spending by $30 billion Increase taxes by $30 billion

Suppose the federal government had budget surpluses of $80 billion in year 1 and $120 billion in year 2 but had budget deficits of $10 billion in year 3 and $40 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government's public debt would have:

decreased by $150 billion

Countercyclical discretionary fiscal policy calls for

deficits during recessions and surpluses during periods of demand-pull inflation

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 transfer payments rise. Balancing the budget would require lowering transfer payments and raising taxes.

Built-in, or automatic, stabilizers work by changing______ so that GDP changes are reduced

taxes and government payouts

The public debt is the amount of money that:

the federal government owes to holders of U.S. securities

If the annual interest payments on the debt sharply increased as a percentage of the GDP

the government would have to use tax revenues or go deeper into debt