Macroeconomics Chapter 13

If the MPC is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by:

$250 million

Spending for Medicare and Medicaid accounts for what percentage of federal spending?

20%

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:

5.

In the United States in 2011, public debt accounted for about _______ of GDP.

68%

A government surplus is contractionary because:

A) increases in taxation are contractionary. B) decreases in government purchases are contractionary. C) decreases in government transfers are contractionary. D) All of the above are correct.

(Figure: Short- and Long-Run Equilibrium) Using the accompanying figure, which of the following would be the appropriate response of the government upon viewing the state of the economy?

Expand aggregate demand by cutting taxes to close the recessionary gap.

A government would be able to pay off its debt if:

GDP grows faster than the government's debt.

Economists believe that the budget should be balanced each fiscal year. Is this correct?

No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

Implicit liabilities refer to the promises made by the government, such as:

Social Security and Medicare payments.

The budget balance is calculated as

T - G - TR.

(Figure: Inflationary and Recessionary Gaps) Which of the following measures a recessionary gap?

Y2 - Y1.

(Figure: Inflationary and Recessionary Gaps) Which of the following measures an inflationary gap?

Y3 - Y2

Suppose the economy is operating at an output level of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. Which of the following would be required to close this recessionary gap?

a $250 billion increase in government spending

The difference between a budget deficit and government debt is that:

a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the amount the government owes.

Suppose the economy is in a recessionary gap. Which of the following fiscal policy options is likely to increase real GDP by the largest amount?

an increase in government purchases

Changes in the budget balance:

can be both the result of and the cause of changes in the economy

Discretionary fiscal policy refers to:

changes in government spending or taxes intended to close a recessionary or inflationary gap.

Policy makers use a contractionary fiscal policy when they want to:

close an inflationary gap.

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

decrease taxes.

Suppose the economy is in an inflationary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

decrease government purchases.

The presence of an automatic stabilizer in government tax revenue that occurs when GDP rises:

decreases the size of the multiplier.

The effect of a government deficit on the economy is:

expansionary.

The Social Security trust fund refers to the:

government bonds held by the Social Security system.

Public debt is:

government debt held by individuals and institutions outside the government.

Social insurance programs are:

government programs intended to protect families against economic hardships.

Consumer spending will rise if:

government transfers rise.

(Figure: Inflationary and Recessionary Gaps) At E1, the economy:

has a recessionary gap.

(Figure: Inflationary and Recessionary Gaps) At E3, the economy:

has an inflationary gap.

(Figure: Inflationary and Recessionary Gaps) A movement from AD3 to AD1 could be caused by:

higher tax rates.

Fiscal experts in the United States are currently most concerned about the country's:

implicit liabilities

If the average retirement age decreases:

implicit liabilities will increase.

Social Security spending is projected to:

increase because of the impact of the baby boom.

(Figure: Short- and Long-Run Equilibrium) If the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output would be a(n):

increase in transfer payments.

(Figure: Inflationary and Recessionary Gaps) A movement from AD1 to AD3 could be caused by:

increased government purchases, increased government transfers, or lower tax rates.

Expansionary fiscal policy:

increases aggregate demand.

(Figure: Inflationary and Recessionary Gaps) At E2, the economy:

is in equilibrium.

One of the shortcomings of fiscal policy is that:

it has time lags and sometimes it may end up destabilizing the economy as a result of these lags

Discretionary fiscal policy may fail to stabilize the economy or may even make the economy less stable because of:

lags in deciding on and implementing a policy change

To close a recessionary gap by employing fiscal policy, the government could:

lower the corporate income tax rate.

The federal government's largest source of tax revenue is:

personal income and corporate profit taxes.

Contractionary fiscal policy includes:

raising tax rates

(Figure: Short- and Long-Run Equilibrium) If the economy is at equilibrium at E1, it is experiencing a(n):

recessionary gap.

contractionary fiscal policy is one that:

reduces aggregate demand by decreasing government purchases.

When the unemployment rate increases, the budget:

tends to move into deficit.

Because of the role of automatic stabilizers and discretionary fiscal policy, the historical record of the United States since 1970 shows that:

the budget tends to move into a deficit during recessions.

The larger the amount of outstanding public debt:

the larger the fraction of the federal budget that must be devoted to interest payments.

If government spending increases and taxes decrease:

the public debt will increase.

Government payments to households for which no good or service is provided in return are called:

transfer payments.

Medicaid, Medicare, and Social Security are examples of:

transfer payments.

The theory of Ricardian equivalence argues that expansionary fiscal policy:

will have no effect on the economy because consumers, anticipating higher future taxes to pay for government spending, will decrease spending today to save for the future higher taxes.