Government Budget and Fiscal Policy

The expenditure multiplier is

1/(1-MPC)

If the marginal propensity to consume is two-thirds, the multiplier is

3

What would the multiplier be if the marginal propensity to consume was A: 1/3 B: 1/2 C: 3/4

A: 1.5 B: 2 C: 4

The federal government buys $20 million worth of computers from Dell. If the MPC is 0.60, what will be the impact on aggregate demand, other things being equal.

Aggregate demand will increase $50 million

If an economy moves into a recession, causing that country to produce less than potential GDP then:

Automatic stabilizers will cause tax revenue to decrease and government spending to increase.

A ____ is created each time the federal government spends more than it collects in taxes in a given year

Budget deficit

An increase in taxes combined with a decrease in government purchases would

Decrease AD

How does the government finance budget deficits

It issues debt to government agencies, private institutions, and private investors

A____ policy will cause a greater share of income to be collected from those with high incomes than from those with lower incomes.

Progressive tax

A policy which increased the federal government deficit would tend to increase which of the following in the short run, other things being equal?

aggregate demand real output the price level employment

The government can use _____ in the form of ____ to increase the level of aggregate demand in the economy.

an expansionary fiscal policy; an increase in government spending

A _____ means that government spending and taxes are equal.

balanced budget

A typical_____ fiscal policy allows government to decrease the level of aggregate demand, through increases in taxes.

contractionary

If the government wanted to offset the effect of a boom in consumer and investor confidence onAD, it might

decrease government purchases increase taxes

When taxes are increased, disposable income____, and hence consumption_____.

decreases, decreases

When the government passes a new law that explicitly changes overall tax or spending levels, it is enacting.

discretionary fiscal policy

One of the real-world complexities of countercyclical fiscal policy is that

fiscal policy is based on forecasts, which are not foolproof a lag occurs between a change in fiscal policy and its effect how much of the multiplier effects will take place in a given amount of time is uncertain.

In the short run, expansionary fiscal policy can cause a rise in real GDP

in combination with a rise in the price level

If a country's GDP decreases, but its debt increases during that year, then he country's debt to GDP ration for the year will _____ in proportion to the magnitude of the changes.

increase

Starting a full employment, if MPC= 2/3, an increase in government purchases of $10 billion would lead AD to ____ and ____ real output in the long run.

increase $30 billion; not change

By June, 2010, the U.S. government owed $13.6 trillion dollars _____ that, over time, has remained unpaid.

is accumulated government debt

Higher budget deficits would tend to

raise interest rates reduce investment reduce the growth rate of the capital stock

If government tax policy requires Peter to pay $15,000 in tax on annual income of $200,000 and Paul to pay $10,000 in tax on annual income of $100,000, then the tax policy is:

regressive

When the share of individual income tax collected by the government from people with higher incomes is smaller than the share of tax collected from people with lower incomes, then the tax is....

regressive

According to the crowding-out effect, if the federal government borrows to finance deficit spending,

the demand for loanable funds will increase, driving interest rates up.

During a recession, if a government uses an expansionary fiscal policy to increase GDP, the:

Aggregate demand curve will shift to the right

If the government wanted to move the economy out of a current recession, which of the following might be an appropriate policy action:

Decrease taxes increase government purchases of goods and services increase transfer payments

Contractionary fiscal policy consists of

Decreased government spending and increased taxes.

In order for the economy pictured here to return to RGDPNR, this economy could use

Decreased taxes and increased government purchases.

If a government reduces taxes in order to increase the level of aggregate demand, what type of fiscal policy is being used?

Expansionary

Budget deficits are created when

Government spending exceeds its tax revenues

A combination of an increase in government purchases and a decrease in taxes would

Increase AD

If government policymakers were worried about the inflationary potential of the economy, which of the following would not be a correct fiscal policy change?

Increase government purchases.

During a recession, government transfer payments automatically ____ and tax revenue automatically ____.

Increase; fall

A _____ is calculated as a flat percentage of income earned, regardless of level of income.

Proportional tax

AD will shift to the right, other things being equal when

the government budget deficits increases because government purchases rose the government budget deficit increases because taxes fell the government budget deficits increases because transfer payment rose.

When inflation begins to climb to unacceptable levels in the economy, the government should:

use contractionary fiscal policy shift aggregate demand to the left.