Macro HW5

During a recession, rising transfer payments and falling tax collections

-help cushion households from the impact of the recession. -buffers the fall in real GDP (relative to a situation where transfer payments do not rise and tax revenues do not fall). -tend to increase or budget deficit or reduce a budget surplus.

According to Mankiw, What would Keynes have done in the recession of 2007-09?

. increase government spending

Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $12,000. What is the marginal propensity to consume?

0.6

Suppose the consumption function is C = $500 + 0.8Y. If Y = $1,000, what is the amount of consumption?

$1,300

Suppose that income taxes are increased by $600 billion. If the marginal propensity to consume is 0.75 and the spending multiplier is 4, by how much will the aggregate demand curve shift at a given price level?

$1,800 billion

Which of the following describes a discretionary fiscal policy action/program?

The government increases funding for the Dislocated Worker Program, a federal initiative that provides retraining and career counseling.

Which of the following statements is true about fiscal policy lags?

Unlike discretionary fiscal policy, automatic stabilizers respond automatically to changes in the economy, thus avoiding the recognition and implementation lags.

Which of the following is considered investment?

a brand new robot purchased for use on an automobile assembly line

A decrease in interest rates will cause

an increase in investment

All of the following are instruments of fiscal policy except

an interest rate cut. ( rebate on payroll taxes, education tax credits, unemployment insurance benefits.)

In the short run, the most important consequence of a decrease in investment is a(n)

decrease in aggregate demand.

A decrease in investment demand would most likely be caused by a

decrease in the expected demand for output.

The marginal propensity to consume is the

change in consumption divided by the change in disposable personal income.

A change in government purchases shifts the aggregate demand curve by an amount equal to the

change in government purchases x spending multiplier.

The bulk of aggregate demand in the United States consists of

consumption.

Discretionary fiscal policy refers to

deliberate government efforts to stabilize the economy through government spending and taxes.

Some economists argue that

discretionary fiscal policy is ineffective because of its long implementation lag.

All of the following are examples of transfer payments except

dividend payments to the wealthy. ( welfare benefits to the poor,Social Security payments to the elderly, unemployment compensation to the unemployed)

Government tax and expenditure policies put in place by the Federal government to stabilize the economy are called

fiscal policy

Supply-side economics is the school of thought that advocates the use of

fiscal policy to stimulate short-run aggregate supply.

The use of government expenditures and taxes to influence the level of economic activity is called

fiscal policy.

In the United States, most of the government's taxing and spending is

for purposes other than economic stabilization.

All of the following are examples of automatic stabilizers except

government emergency spending (personal income taxes, means-tested federal transfer payments, welfare benefits.)

Public investment expenditure for highways, schools, and national defense is included in which component of GDP?

government purchases

An increase in aggregate demand causes an increase in _______, which in turn induces an increase in _______.

income, consumption

The 2009 stimulus legislation, technically known as the American Recovery and Reinvestment Act included

tax cuts for families and businesses, increased transfer payments, like unemployment insurance, increased direct government spending, like infrastructure investment.

Which of the following best explains why a $10 billion tax cut is likely to have a smaller impact on aggregate demand than a $10 billion increase in government purchases?

tax cuts increase disposable income, some of which may be saved while all of the increased government spending is spent

The smaller the marginal propensity to consume,

the greater the value of the multiplier.

Disposable personal income is

the income households receive that is available for consumption and saving.

Which of the following contributes to implementation lag for discretionary fiscal policy?

the time it takes to secure bureaucratic approval for policy actions

If private sector investment does not respond much to interest rate changes, then

there will be less crowding out when expansionary policies are undertaken.

The immediate impact of instituting investment tax credits is

to stimulate private sector investments and increase aggregate demand.

An expansionary fiscal policy shifts the aggregate demand curve

to the right and is used to increase output

Medicaid, welfare payments, and Temporary Assistance to Needy Families are classified as

transfer payments.

Payments to households that do not require anything in exchange are called

transfer payments.

A recessionary gap can be closed with

using an expansionary fiscal policy.

What is equilibrium output and the multiplier in the following model? Consumption=100+.9Y Investment =100 Gov't Spending =100 Net Exports = 0

30,000

Automatic stabilizers tend to exaggerate the severity of business cycles.

False

Fiscal policy has a short implementation lag compared to monetary policy.

False

Higher interest rates encourage investment.

False

The national debt is the difference between current government expenditures and taxes.

False

What is an automatic stabilizer?

It refers to any government program that tends to reduce fluctuations in GDP automatically.

Which of the following is an advantage of automatic stabilizers?

There is no implementation lag for automatic stabilizers

An increase in business taxes is likely to reduce aggregate demand because of a decrease in private investment.

True

Net investment adds to the nation's capital stock

True

Transfer payments tend to rise automatically during a recession and fall automatically during an expansion.

True

An expansionary fiscal policy is likely to

increase borrowing by the Treasury through the sale of bonds

Contractionary fiscal policy includes

increasing taxes and decreasing government expenditures.

The government has a budget deficit if

its total revenues are less than its total expenditures.

The term "crowding out" refers to the phenomenon that occurs when increased government spending

leads to higher interest rates which reduces private investments.

The impact of fiscal policy is

magnified because of the multiplier and weakened because of crowding out.

The sum of all past federal deficits minus any surpluses is called the

national debt.

For the following model, if output is 1000 is the economy in equilibrium? Consumption=100+.5Y Investment =100 Investment =100 Gov't Spending =0 Net Exports = 0 Exports = 0

no, because D<Y

Taxes assessed on firms and employees on wages and salaries earned are called

payroll taxes.

During an economic downturn, households respond to a decline in income by

reducing consumption

The consumption function expresses the

relationship between consumption and disposable personal income.