Macroeconomics Chapter 13

The public debt is the:

Accumulation of all past deficits minus all past surpluses?

The built-in stabilizers in the economy tend to:

Dampen the irregular swings in real GDP

Which of the following is an example of built-in stability? As real GDP decreases income tax revenues:

Decrease and transfer payments increase

The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case the crowding-out effect suggests that investment spending would:

Decrease, thus partially offsetting the fiscal policy

From 1995 to 2001 the U.S. public debt relative to GDP:

Decreased, and increased since then

When the Federal government takes budgetary action to stimulate the economy or rein in inflation such policy is:

Discretionary Fiscal Policy

Most of the U.S. public debt is owed to the nation's citizens and domestic institutions. This is one reason that the public debt:

Does not impose a large burden on future generations

If a government wants to pursue an expansionary fiscal policy then a tax cut of a certain size will be more expansionary when the:

Economy's MPS is small

If Congress passes legislation to increase government spending to counter the effects of a recession then this would be an example of a(n):

Expansionary fiscal policy

A decrease in government spending and a cut in taxes would be a pair of fiscal policies that reinforce each other.

False

Most economists believe that fiscal policy is:

Better than monetary policy for "fine-tuning" the economy

The economy starts out with a balanced Federal budget. If the government then implements expansionary fiscal policy then there will be a:

Budget deficit

If people expected that a fiscal policy in the form of a tax cut was temporary then this policy's effect on the economy will tend to be:

Weaker

The following is budget information for a hypothetical economy. All data are in billions of dollars. Refer to the above table. In which year is there a budget surplus?

Year 1

The following is budget information for a hypothetical economy. All data are in billions of dollars. Refer to the above table. In which year is there a balanced budget?

Year 2

In 2012

interest payments on the public debt, as a percentage of GDP were about:, 23 percent?

In the graph above

tax revenues vary:, Directly with the level of GDP

In 2012

the general public (excluding Federal agencies) held about what percentage of U.S. Federal debt?, 60%?

In 2012

the public debt in the U.S. on a per capita basis was about:, $52,000

Assume that if there was no crowding-out an increase in government spending would increase GDP by $100 billion. If there had been partial crowding-out however

then GDP would have:, Increased by less than $100 billion

In an economy the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25 then it could:

Increase taxes by $16 billion

Assume that if there was no crowding-out an increase in government spending would increase GDP by $100 billion. On the other hand if there had been full crowding-out then GDP would have:

Increased by $100 billion?

The crowding-out effect suggests that:

Increases in government spending may reduce private investment

The crowding-out effect tends to be stronger when the economy:

Is at, or close to, full employment

Refer to the figure above. The economy is at equilibrium at point B. What would expansionary fiscal policy do?

Move the economy from point B towards point A

When changes in taxes and government spending occur in the economy without explicit action by Congress such policy is called ______ fiscal policy:

Nondiscretionary

Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. To fight a recession Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin.

Operational lag

Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. To fight a recession the president issues an executive order requiring Federal agencies to get rid of petty regulations that burden private businesses—but the Federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.

Operational lag

Refer to the graph above. Assume that the economy initially has a price level of P1 and output level Q1. If the government implements expansionary fiscal policy and the full multiplier effect was felt it would bring the economy to:

P1 and Q3

Refer to the graph above. Assume that the economy is in a recession with a price level of P1 and output level Q1. The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new equilibrium price level and output?

P2 and Q2

The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending assuming that the aggregate supply curve is horizontal across the range of GDP being considered?

$10 billion

An economy is experiencing a high rate of inflation. The government wants to reduce GDP (income) 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

The following is budget information for a hypothetical economy. All data are in billions of dollars. Refer to the above table. Assume that Year 1 is the first year for this economy and Year 5 is the current year. What is the public debt in this economy at Year 5?

$125 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

Of the U.S. Federal debt held by foreigners in 2012 China held roughly:

22%

In 2012 foreign ownership of the total public debt of the U.S. was about:

33%

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 fiscal policy changes would be the most expansionary?

A $40 billion increase in government spending?

Which of the following expansionary fiscal policy changes would be most favored by those economists who think that the government is too large and inefficient?

A $40 billion tax cut

Refer to the above graph. What combination would most likely cause a shift from AD1 to AD2?

A decrease in taxes and an increase in government spending

Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. A sudden recession is recognized by politicians but it takes many months of political deal making before a stimulus bill is finally approved.

Administrative lag

As of 2012 most of the U.S. Federal debt was owed to:

Americans

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion then what combination of actions would be most consistent with closing the GDP-gap here?

Decrease government spending and taxes?

The effect of an increase in the government budget deficit on the equilibrium level of GDP is essentially the same as a(n):

Decrease in saving

Actions by the Federal government that decrease the progressivity of the tax system:

Decrease the effect of automatic stabilizers

A given reduction in government spending will dampen demand-pull inflation by a greater amount when the:

Economy's aggregate supply curve is steep

Expansionary fiscal policy will tend to reduce the budget deficit.

False

If taxation becomes more progressive the built-in stability in the economy will decrease.

False

The crowding-out effect will be minimal when the economy is in a severe recession.

False

The goal of expansionary fiscal policy is to rein in inflation.

False

The impact of an expansionary fiscal policy may be strengthened if it crowds out some private investment spending.

False

The so-called "recognition lag" associated with fiscal policy is a result of how slowly the U.S. Congress moves.

False

A Federal budget deficit exists when:

Federal government spending exceeds tax revenues in a given year

When the Federal government uses taxation and spending actions to stimulate the economy it is conducting:

Fiscal policy

Which combination of fiscal policy actions would most likely offset each other?

Increase taxes and government spending

One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy:

Is not subject to the timing problems of discretionary policy

Which of the following nations had the highest public sector debt as a percentage of GDP in 2012?

Japan

Refer to the graph above. A budget surplus would be associated with GDP level:

L

To track the public debt over time and understand its significance to the economy it is best:

Measured relative to the gross domestic product

Refer to the figure above. The economy is at equilibrium at point C which is below potential output. What fiscal policy would increase real GDP?

Shift aggregate demand by increasing transfer payments

The economic burden of World War II for the United States was primarily:

Shifted to future generations by bond financing?

Contractionary fiscal policy would tend to make a budget deficit become:

Smaller

One timing problem in using fiscal policy to counter a recession is the "recognition lag" that occurs between the:

Start of the recession and the time it takes to recognize that the recession has started.

If the government wishes to increase the level of real GDP it might reduce:

Taxes

In January the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February the Federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result firms cut back their borrowing to only $30 billion per month. Which of the following is true?

There is a crowding-out effect of $20 billion.

One timing problem in using fiscal policy to counter a recession is the "administrative lag" that occurs between the:

Time the need for the fiscal action is recognized and the time that the action is taken

Built-in stability is exemplified by the fact that with a progressive tax system net tax revenues decrease when GDP decreases.

True

Expansionary fiscal policy during a recession means cutting taxes increasing government spending or taking both actions.

True

It is possible for an increase in government spending to encourage instead of crowding out private investment.

True

The concept of a "political business cycle" implies a misuse of fiscal policy making it a source of economic instability.

True

The so-called crowding-out effect refers to government spending crowding out private investment spending.

True

Transfer payments that increase as GDP falls are a type of automatic stabilizer in the economy.

True

The following is budget information for a hypothetical economy. All data are in billions of dollars. Refer to the above table. The budget deficit was $75 billion in:

Year 5

If the crowding-out effect is at its maximum strength it follows that an increase in government spending would:

Cause aggregate demand and GDP to decrease?

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation then this would be an example of a(n):

Contractionary fiscal policy

If there is a constitutional requirement to maintain a balanced budget then during a recession when tax revenues are shrinking the government will have to implement:

Contractionary fiscal policy

When the Federal government cuts taxes and increases spending to stimulate the economy during a period of recession such actions are design to be:

Countercyclical

The crowding-out effect arises when:

Government borrows in the money market, thus causing an increase in interest rates

A budget surplus means that:

Government revenues are greater than expenditures in a given year

The more progressive the tax system the:

Greater is the built-in stability for the economy

Automatic stabilizers smooth fluctuations in the economy because they produce changes in the government's budget that:

Help offset changes in GDP

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion then what combination of actions would be most consistent with closing the GDP-gap here?

Increase government spending and taxes?

There is general agreement among economists that a proposed fiscal policy should be evaluated for its:

Potential positive and negative effects on long-run productivity growth

Which of the following would help a government reduce an inflationary output gap?

Raising taxes; Decreasing government spending.

Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. Distracted by a war that is going badly inflation reaches 8 percent before politicians take notice.

Recognition lag

The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n):

Recognition lag

The two reasons why bankruptcy is a false concern about the public debt are:

Refinancing and taxation

Refer to the figure above. The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation?

Shift aggregate demand by increasing taxes

Incurring an internal debt to finance a war like World War II does not pass the true cost of the war on to future generations because:

The opportunity cost of wartime expenditures was borne by the generation that lived during the war

The total amount of debt owed by the Federal government is represented by the total value of the outstanding:

U.S. government securities

Which of the following serves as an automatic stabilizer in the economy?

The progressive income tax

A major reason that the public debt cannot bankrupt the Federal government is because:

The public debt can be easily refinanced by issuing new bonds

When government spending is increased the amount of the increase in aggregate demand primarily depends on:

The size of the multiplier

One timing problem in using fiscal policy to counter a recession is the "operational lag" that occurs between the:

Time fiscal action is taken and the time that the action has its effect on the economy

Proponents of the notion of a "political business cycle" suggest that:

A possible cause of economic fluctuations is the use of fiscal policy by policy-makers for political purposes and goals

The so-called "negative taxes" are better known as:

Transfer payments