Fiscal policy hwk

A phase of the business cycle characterized by increasing real GDP income and employment is called:

an expansion

When taxes increase, AD:

decreases

Crowding out refers to:

the process by which an increase in government borrowing results in less borrowing.

What is income minus taxes?

Disposable income

When government spending decreases, AD:

decreases

The condition AD = AS refers to - equilibrium.

short-run

With an MPC of 0.6, the expenditures multiplier will be equal to

2.5 1/(1-MPC)

The economy experiences a positive demand shock causing the economy to boom. Which is an example of an automatic stabilizer that will work to reduce the undesired expansion?

Average tax rates will automatically rise

Which is a frequently used tool of fiscal policy?

Changes in government purchases.

As an economy expands, the number of people who rely on government programs such as Medicaid, food stamps, and housing assistance (increase/decrease) reducing government expenditures.

Decrease

The goal of automatic stabilizers during an undesired economic boom is to:

Decrease consumption spending and aggregate demand.

This policy involves increasing government purchases and/or decreasing taxes.

Expansionary fiscal policy

Government __ policy has limitations that reduce its effectiveness and may even cause the opposite of what was intended.

Fiscal

Suppose the government of a country changes its level of purchases and/or taxes to achieve full employment and low inflation. What type of policy is this called?

Fiscal Policy

Lags hamper the effectiveness of

Fiscal policy

Explicitly raising taxes has the same basic effect on aggregate demand as:

Higher tax revenues that result from higher income

The average U.S. Federal income tax rates increase as as income rises. Thus the U.S. Federal income tax:

Is a progessive tax

Fiscal policy relies on three assumptions: Recognizing the start of a recession. Government quickly determines effective policy. The policy is immediately effective. Which of these assumptions hold in the real world?

None of the assumptions hold in the real world.

A decline in real output for at least two consecutive quarters is called:

Recession

In the short run, in order to stimulate aggregate demand and avoid falling output and prices, the government could __ taxes.

Reduce

With demand-pull inflation, active fiscal policy calls for __ government purchases.

Reducing

A change in aggregate demand equals the _ multiplier times the initial change in taxes.

Tax

Which of the following is a limitation of implementing fiscal policies during a recession? Multiple choice question. Fiscal policy is often too subtle to influence the economy. Government officials implementing fiscal policy may misprice goods and services. Fiscal policy creates shortages that limit its usefulness. There are lags that delay the effectiveness of fiscal policy.

There are lags that delay the effectiveness of fiscal policy.

are payments the government makes to households and businesses that do not require an exchange of productive activity.

Transfer payments

During a recession, more people begin to receive unemployment payments, food stamps, Medicaid, and payments from other government programs causing government spending to automatically increase. (True or False)

True

We cannot know that a recession is occurring until we are in it.

True

We usually do not have certainty about the state of the economy on any given day.

True

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. An expansion occurs resulting from a $100 billion increase in aggregate demand. In order to restore the economy to full employment given a MPC of 0.80, government purchases would need to:

decrease by $20 billion.

Suppose an economy is in long-run equilibrium at a price level of 100 and a full-employment real GDP of $520 billion. A recession occurs because of a $120 billion decrease in aggregate demand. To restore the economy to full employment given an MPC of 0.75, taxes would need to:

decrease by $40 billion.

Active fiscal policy calls for reducing government purchases in case of:

demand-pull inflation.

If the economy is experiencing a recession, the goal of fiscal policy will be to:

increase aggregate demand.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $50 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.6, government purchases would need to:

increase by $20 billion.

The condition Y = Yfull employment refers to - equilibrium.

long-run

When an economy is producing above full employment, the goal of fiscal policy will be to:

reduce aggregate demand.

One of the most frequently used tools of fiscal policy is changing:

taxes

The multiplier effect is:

the concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP.

Full-employment GDP refers to:

the level of real GDP produced in an economy when it is operating at the natural rate of unemployment.

The business cycle is:

the short-term fluctuations experienced in the economy due to changes in levels of economic activity.