Macroeconomics Final Review

Crowding out occurs when the government:

Borrows money, thus making it more difficult for the private sector to borrow.

T/F Approximately 20% of the expenditures in the federal budget are "uncontrollable"

False

T/F In general, a budget surplus tends to change the mix of output in the direction of more public sector goods and fewer private sector goods

False

T/F They cyclical deficit narrows when unemployment or inflation increase

False

T/F automatic stabilizers reduce government expenditures and decreased budget deficits when the economy is in a recession

False

a budget deficit is incurred whenever

Tax revenues fall short of expenditures over the fiscal year.

T/F When foreigners help finance US deficit, US residents can consume more than they produce

True

T/F according to Keynes, a balanced budget would be appropriate only if all other injections and leakages were in balance and the economy was in full employment.

True

T/F part of the deficit arises from cyclical changes in the economy, the rest is the result of discretionary fiscal policy

True

T/F the national debt is both an asset and a liability to future generations

True

getting the timing right can be more difficult with one of these policies. which one? a. fiscal policy b. monetary policy c. environmental policy d. all of the above

a

externally held US dent results in

a burden to the United States when foreign owned bonds are cashed in and the proceeds are used to buy goods and services produced in the United States

what is the long-run effect of a permanent increase in government spending?

a decline in investment, consumptions, and net exports that exactly offsets the increase in government purchases, therefore aggregate demand remains unchanged

when the federal government runs a budget surplus, it is

adding a leakage to the circular flow

higher interest rates in the United States will attract foreign investors. This will cause _______________ in the exchange rate between the dollar and the other currencies, and _______________

an increase, a decrease

Changes in taxes and spending that happen without actions by the government are called

automatic stabilizers

Every time the federal government runs a budget deficit, the Treasury must

borrow funds from savers by selling Treasury securities

deficit spending can be financed in the same year by

borrowing from foreign sources, borrowing from the banking system and the private sector, and US treasury bonds.

An attempt to reduce inflation requires​ _____________ fiscal​ policy, which causes real GDP to​ _________ and the price level to​ __________.

contractionary; fall; fall

which of the following uses of a budget surplus has the potential of increasing the private sector's portion output?

cutting taxes, paying off a portion of the national debt, increasing transfer payments

when the government takes actions to change taxes and spending, the type of policy involved is called

discretionary fiscal policy

Deficit spending results whenever the government

finances expenditures that exceed tax revenues

in contrast to the structural deficit, the cyclical deficit reflects

fluctuations in economic activity

which of the following was a period of federal budget surpluses?

from 1998 through 2006

what is the relationships between government purchases and government expenditures

government expenditures include government purchases

which of the following is true of nay permanent increase in government purchases in the long run>

in the long run, any permanent increase in government purchase must come at the expense of private expenditures

when the economy is in a recession, the government can

increase government purchase or decrease taxes in order to increase aggregte demand

the magnitude of a fiscal stimulus is measured by

increase in the structural deficit (or decrease in the structural surplus)

According to the crowding-out effect, if the federal government increases spending, the demand for money and the equilibrium interest rate will_____________, which will cause some consumption investment, and net exports to______________

increase, decrease

budget deficits automatically __________ during recessions and ____________ during expansions

increase, decrease

which of the following are the largest sources of federal government revenue?

individual income taxes and social security taxes

discretionary fiscal spending includes

interest payments on the national debt, medicare benefits, pensions for retired government workers

the cyclically adjusted budget deficit,

is measured as if the economy were at potential real GDP.

The U.S. government increase spending for the defense and homeland security after 2001 to fund the war on terrorism and the invasion of Iraq. these spending increases are considered

part of the defense and homeland security, but not fiscal policy

which of the following will reduce the inflation rate>

reducing government purchases or increasing taxes

we would expect the tax multiplies to be __________________ in absolute value than the government purchases multiplier

smaller

because they can quickly change policy in response to chaining economic conditions

the Red plays a larger role in stabilizing the economy than the president and congress

according to Keynes, it was acceptable for the budget to be unbalanced if

the economy was below full employment, leakages and injections were out of balance, and the economy was above full employment

the major reason budget deficits were reduced during the 1990s and surpluses were experienced in 1998-2001 was

the growing us economy

economists believe that the smaller that tax wedge for any economic activity, such as working, saving, investing, or starting a business

the more of that economic activity that will occur

which of the following is the main reason for the long-run funding problems of social security?

the number of workers per retiree continues to decline

which of the following statements is incorrect

the only difference between fiscal policy and monetary policy in fighting recessions and stimulating spending is where the money comes from

automatic stabilizers tend to stabilize the level of economic activity because

they increase spending during recession and decrease spending during inflationary periods

which of the follow statements about the federal debt is corredt?

us the debt becomes very large relative to the economy, then the government may have to raise taxes to high levels, or cut back on other types of spending to make interest payments on the debt

If all of the national debt were owned internally, then:

we would still have to worry about the effect of interest payments on the distribution of income

tax simplification and reductions in tax rates will result in

additional shifts to the right in LRAS leading to a lower price level and higher real GDP

at the end of june 2007, the federal government debt was $8.9 trillion. More than half of this debt was held by

agencies of the federal government

which of the following fiscal policy actions will increase real GDP in the short run?

an increase in government expenditures

which of the following policies can the government use to pay for Social Security in the future?

an increase in income taxes, a decrease in social security benefits, a decrease in spending for other government programs

The effect on the economy of tax reduction and simplification is

an increase in the quality of real GDP supplied at every price level, or a shift in the long-run aggregate supply curve

to obtain a more accurate measure of the effects on the economy of the government's spending and tax policies, economists prefer to look at

the cyclically adjusted budget deficit or surplus

which of the following are categories of federal government expenditures?

transfer payments, interest on national debt, grants to state and local government

the structural deficit represents

Federal revenues minus federal expenditures at full employment under current fiscal policy.

which of the following statements about the US national debt is not correct? a. the national debt represents both a liability and an asset. b. the primary burden of the debt incurred when the deficit-financed activity tales place c. the primary economic cost of the debt are being passed on the future generations d. future generations will bear some of the debt burden when it is externally financed

c

Crowding out refers to

the decline in private expenditures that result from an increase in government purchases

the global expansionary fiscal policy is

to increase aggregate demand

the largest and fastest growing category of federal expenditure is

transfer payments

T/F discretionary fiscal policy is stimulative if the structural deficit is shrinking (the surplus is growing)

False

T/F the true burden of the debt is the reduction in national wealth when the federal government borrows money by selling bonds

False

Spending on most of the federal government's day-to-day activities—including running federal agencies like the Environmental Protection Agency, the FBI, the National Park Service, and the Immigration and Customs Enforcement—make up

less than 10% of federal government expenditures

the multiplier effect consists of

a series of induced increases in consumption spending that result from an initial increase in autonomous spending

the the federal government's expenditures are greater than its revenue, there is a

budget deficit

by how much will equilibrium real GDP increase as a result of a $100 billion increase in government purchases?

by more than $100 billion

When the U.S. Treasury issues new bonds to replace bonds that have matured, it is engaging in

debt financing

When the tax rate increases, the size of the multiplier effect:

decreases

is a tax cut has supply-side effects, then

it will affect both aggregate demand and aggregate supply

how would you decompose the total effect of an increase in government purchases on the aggregate demand curve (note: the magnitude of the shifts don't have to be the same.)

the aggregate demand curve shifts as a result of two distinct effects, twice to the right

a deficit ceiling limits

the amount by which government spending can exceed government revenue

the tax multiplier equals

the change in equilibrium GDP divided by the change in taxes