Macroeconomics CH 16

10. Since the Social Security system began in 1935, the number of workers per retiree has A) stayed roughly the same. B) continually risen. C) continually declined. D) risen and declined with different generations.

C

20. Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant A) decrease in oil prices. B) decrease in real GDP. C) increase in inflation. D) increase in labor productivity.

C

28. An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. A) increase; rise; falls B) increase; fall; rises C) decrease; rise; falls D) decrease; fall; rises

C

29. The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was A) in a recession. B) in an expansion. C) at potential GDP. D) at potential tax revenue.

C

8. Government transfer payments include which of the following? A) interest on the national debt B) grants to state and local governments C) Social Security and Medicare programs D) national defense

C

9. The largest source of federal government revenue in 2012 was A) sales taxes. B) corporate income taxes. C) individual income taxes. D) payroll taxes to fund Social Security and Medicare programs.

C

Change in real GDP =

Change in government purchases / (1- MPC)

Fiscal policy is determined by Congress and the Federal Reserve. the president and the Federal Reserve. Congress and the president. the Federal Reserve.

Congress and the president.

Which of the following is considered contractionary fiscal policy? Legislation removes a college tuition deduction from federal income taxes. Congress increases defense spending. Congress increases the income tax rate. The New Jersey legislature cuts highway spending to balance its budget.

Congress increases the income tax rate.

contractionary actions by Congress and the President

Decrease government spending or raise taxes

Intentional actions the government takes to change spending or taxes

Discretionary fiscal policy

Increasing government purchases or decreasing taxes.

Expansionary fiscal policy

T / F Deficit and debt are the same thing.

F

T / F Contractionary fiscal policy causes prices to fall.

F Inflation falls

Changes in Federal Taxes and purchases that are intended to achieve macroeconomic policy objectives.

Fiscal Policy

If the government increases its spending on goods and services, then aggregate demand increases immediately. This is known as ___ increase in aggregate demand.

autonomous

22. The multiplier effect refers to the series of A) autonomous increases in consumption spending that result from an initial increase in induced expenditures. B) induced increases in consumption spending that result from an initial increase in autonomous expenditures. C) autonomous increases in investment spending that result from an initial increase in induced expenditures. D) induced increases in investment spending that result from an initial increase in autonomous expenditures.

B

How to shift AD/SRAS intersect to the right... Refer to Figure 16-2. In the graph above, if the economy is at point A, an appropriate fiscal policy by the Congress and the president would be to lower the discount rate of interest. increase government transfer payments. execute an open market sale of government securities. increase marginal income tax rates.

increase government transfer payments.

Crowding out in the short run causes ____ interest rates, and in effect, consumption, investment, and net exports all fall. So initial increase in spending is partially offset by the crowding out.

increases

Increasing government purchases directly ___ aggregate demand.

increases

Decreasing taxes ___ affects aggregate demand by ___ disposable income, and hence consumption spending.

indirectly; increasing

30. The automatic budget surpluses and budget deficits that occur in the federal budget over the business cycle A) destabilize the economy. B) stabilize the economy. C) decrease potential GDP. D) increase potential GDP.

B

19. Which of the following would be most likely to induce Congress and the president to conduct expansionary fiscal policy? A significant A) decrease in investment spending. B) decrease in oil prices. C) increase in consumption spending. D) increase in net exports.

A

Federal expenditures are now higher than ever-- almost __% of GDP.

25

12. Expansionary fiscal policy involves A) increasing government purchases or decreasing taxes. B) increasing taxes or decreasing government purchases. C) increasing the money supply and decreasing interest rates. D) decreasing the money supply and increasing interest rates.

A

14. Which of the following is considered contractionary fiscal policy? A) Congress increases the income tax rate. B) Congress increases defense spending. C) Legislation removes a college tuition deduction from federal income taxes. D) The New Jersey legislature cuts highway spending to balance its budget.

A

15. Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________ than otherwise. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

A

11. Which of the following provides health-care coverage to people age 65 and over? A) Medicaid B) Medicare C) Social Security D) Health-Aid

B

18. The problem causing most recessions is too little A) money (currency plus checking accounts). B) spending. C) unemployment. D) taxes.

B

Involves decreasing government purchases or increasing taxes.

Contractionary Fiscal Policy

Affects the incentives of firms to engage in investment.

Corporate income tax

The deficit or surplus in the federal government's budget if the economy were at potential GDP.

Cyclically adjusted budget deficit or surplus

17. Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________ than otherwise. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

D

23. Which of the following would increase the size of the government purchases multiplier? A) an increase in the tax rate B) an increase in the quantity of imports purchased by households from an increase in income C) a decrease in the amount of consumption spending by households from an increase in income D) a decrease in the amount saved by households from an increase in income

D

Affects labor supply decisions and the returns to entrepreneurship.

Individual income tax

Tax reform has the potential to shift

LRAS

The series of induced increases in consumption spending that results from the initial increase in autonomous expenditures is know as

Multiplier effect

When an individual decides how much to work, he bases the decision on how much an hour of work will increase his ability to consume goods and services

Posttax wage

When a firm decides how many people to employ, it considers how much it has to pay in total for each worker

Pretax wage

Decrease government spending or raise taxes result

Real GDP and the price level fall

Affects the supply of loanable funds from households to firms, and hence the real interest rate. Also affects the way firms disburse profits—2003 reduction in dividend tax led some firms like Microsoft to pay dividends for the first time.

Tax on dividends and capital gains

Which of the following would be classified as fiscal policy? The Federal Reserve cuts interest rates to stimulate the economy. The federal government passes tax cuts to encourage firms to reduce air pollution. States increase taxes to fund education. The federal government cuts taxes to stimulate the economy. A state government cuts taxes to help the economy of the state.

The federal government cuts taxes to stimulate the economy.

Equilibrium GDP =

Y = C + MPC(Y - T) + I + G

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) a $133.33 billion decrease in GDP a $133.33 billion increase in GDP a $300 billion increase in GDP a $300 billion decrease in GDP a $30 billion increase in GDP

a $300 billion decrease in GDP

The tax multiplier applies to changes in the ___ of taxes without changes in tax ___.

amounts; rates

A change in consumption spending caused by income changes is ________ change in spending, and a change in government spending that occurs to improve roads and bridges is ________ change in spending. an autonomous; an induced a contractionary; an expansionary an expansionary; a contractionary an induced; an autonomous

an induced; an autonomous

Forms of government spending and taxes that automatically increase or decrease along with the business cycle

automatic stabilizers

The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of automatic monetary policy. automatic stabilizers. discretionary monetary policy. discretionary fiscal policy.

automatic stabilizers.

Government's expenditures are greater than its tax revenue.

budget deficit

Government's expenditures are less than its tax revenue.

budget surplus

The aggregate demand curve will shift to the right ________ the initial increase in government purchases. by less than by more than by the same amount as sometimes by more than and other times by less than

by more than.

Government purchases multiplier =

change in equilibrium real GDP / change in government purchases

Tax multiplier =

change in equilibrium real GDP / change in taxes

People receive autonomous increases in aggregate demand as increased income and increase their ___ spending accordingly. This is the ___ increase in aggregate demand.

consumption; induced

Rising inflation policy

contractionary

To decrease inflation, the government can enact ___ fiscal policy. This is when the real GDP is above potential GDP.

contractionary

A decline in private expenditures as a result of an increase in government purchases

crowding out

If the government believes real GDP will be below potential GDP, it can enact ___ fiscal policy in an attempt to restore long-run equilibrium--decreasing unemployment.

expansionary

Recession policy

expansionary

The total value of securities outstanding

federal government debt

Fiscal policy refers to changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. the money supply and interest rates that are intended to achieve macroeconomic policy objectives. state and local taxes and purchases that are intended to achieve macroeconomic policy objectives. federal taxes and purchases that are intended to fund the war on terrorism.

federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

Simpler taxes would lead to economic ___ for society.

gains

Congress and the president carry out fiscal policy through changes in government purchases and taxes. interest rates and the money supply. government purchases and the money supply. taxes and the interest rate.

government purchases and taxes.

Around ___ of federal expenditures are spent on transfer payments, like Social Security, Medicare, and unemployment insurance.

half

Increasing the disposable income of households, leading them to ___ their consumption spending.

increase

How to shift AD/SRAS intersect to the right... Refer to Figure 16-2. In the graph above, if the economy is at point A, an appropriate fiscal policy by the Congress and the president would be to decrease transfer payments. increase government expenditures. decrease the required reserve ratio. sell government securities.

increase government expenditures.

expansionary actions by Congress and the President

increase government spending or cut taxes

The largest source of federal government revenue in 2012 was payroll taxes to fund Social Security and Medicare programs. corporate income taxes. individual income taxes. sales taxes.

individual income taxes.

The tax multiplier is always less than one. is negative. is larger in absolute value as compared to the government spending multiplier. is a measure of how much taxes will fall when income is falling.

is negative.

Defaulting is not an issue for the USFG because

low interest rate, size of interest payments

Increasing the size of the multiplier effect, since ____ of any increase in income becomes disposable income.

more

Permanent incomes increase consumption ___ than current incomes.

more

Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect. aggregate demand multiplier expenditure consumption

multiplier.

Decrease in government purchases and an increase in taxes have a ___ multiplier effect.

negative

The tax multiplier will be a ___ number. An increase in taxes will ____ the equilibrium real GDP, and vice versa.

negative; decrease

Increase in government purchases and a cut in taxes have a ___ multiplier effect.

positive

increase government spending or cut taxes result

real GDP and the price level rise

Increase in aggregate demand will result in

real GDP rising; price level increase

A temporary increase in government purchases will cause the demand for money, and hence the interest rate, to ___.

rise

We expect the tax multiplier to be ____ (in absolute value) than the government purchases multiplier.

smaller

Fiscal policy actions that are intended to have long-run impacts on potential GDP--i.e. on aggregate supply.

supply-side economics

During the Great Depression, the government was using a cyclically adjusted budget ___.

surplus

Fiscal policy may be even less effective than monetary policy at countercyclical stabilization because of

timing--legislative and implementation delay, and crowding out

The largest and fastest-growing category of federal government expenditures is national park spending. transfer payments. grants to state and local governments. interest on the national debt.

transfer payments.

In the long run, the increase in government purchases (will/will not) have effect on real GDP. The long-run effect is ___ size of government sector within the economy.

will not; increase

25. If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by ________ to restore the economy to potential real GDP. A) $250 billion B) $400 billion C) $640 billion D) None of the above are correct. Taxes should be increased in this case.

A

4. The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of A) automatic stabilizers. B) discretionary fiscal policy. C) discretionary monetary policy. D) automatic monetary policy

A

5. The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of A) automatic stabilizers. B) discretionary fiscal policy. C) discretionary monetary policy. D) automatic monetary policy.

A

6. Which of the following would not be considered an automatic stabilizer? A) legislation increasing funding for job retraining passed during a recession B) decreasing unemployment insurance payments due to decreased jobless during an expansion C) rising income tax collections due to rising incomes during an expansion D) declining food stamp payments due to more persons finding jobs during an expansion

A

Year Potential Real GDP Real GDP Price Level 2013 $14.0 trillion $14.0 trillion 150 2014 14.5 trillion 14.2 trillion 152 21. Refer to the above table. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president want to keep real GDP at its potential level in 2014, they should A) decrease income taxes. B) decrease government purchases. C) decrease the money supply. D) increase the level of interest rates.

A

1. Fiscal policy refers to changes in A) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives. B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives. C) federal taxes and purchases that are intended to fund the war on terrorism. D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

B

13. If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in A) the money supply and a decrease in interest rates. B) government purchases. C) oil prices. D) taxes.

B

16. To combat a recession with discretionary fiscal policy, Congress and the president should A) decrease government spending to balance the budget. B) decrease taxes to increase consumer disposable income. C) lower interest rates and increase investment by increasing the money supply. D) raise taxes on interest and dividends, but not on personal income.

B

2. Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________. A) automatic stabilizers; discretionary fiscal policy B) discretionary fiscal policy; automatic stabilizers C) automatic stabilizers; monetary policy D) discretionary fiscal policy; conscious fiscal policy

B

26. It is ________ difficult to effectively time fiscal policy than monetary policy because ________. A) more; fiscal policy can be quickly decided and changed B) more; fiscal policy takes longer to implement C) less; monetary policy takes longer to decide and change D) less; monetary policy takes longer to implement

B

27. A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. A) increase; rise; falls B) increase; fall; rises C) decrease; rise; falls D) decrease; fall; rises

B

3. Automatic stabilizers refer to A) the money supply and interest rates that automatically increase or decrease along with the business cycle. B) government spending and taxes that automatically increase or decrease along with the business cycle. C) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives. D) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

B

24. If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP. A) $7.25 trillion B) $1 trillion C) $500 billion D) $250 billion

D

7. The largest and fastest-growing category of federal government expenditures is A) grants to state and local governments. B) interest on the national debt. C) national park spending. D) transfer payments.

D