Mod 9 Econ 102

Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, its purchases of goods and services and its transfers are $2 trillion, and tax revenues are $1.5 trillion. At the end of the fiscal year, the debt is:

$7.5 trillion.

Which statement is CORRECT?

Discretionary fiscal policy indicates deliberate action by policy makers

The federal budget is defined as

an annual statement of expenditures and tax revenues of the U.S. government.

During a recession, unemployment benefit payments increase without the need for any government action. This increase is an example of

automatic fiscal policy

In the United States for the year 2020, the federal government had a ________ so the national debt was ________.

budget deficit; increasing

Government expenditure ________ change potential GDP and taxes ________ change potential GDP

can; can

Automatic stabilizers include

changes in induced taxes and changes in needs-tested spending

Some argue that budget deficits will lead to reduced private spending because:

consumers, anticipating higher taxes, will reduce consumption to save money to pay the future taxes.

In a recession, needs-tested spending ________ and induced taxes ________.

increases; decrease

The supply-side effects show that a tax cut on labor income ________ employment and ________ potential GDP.

increases; increases

Discretionary fiscal policy is defined as fiscal policy

initiated by an act of Congress

A reason why discretionary fiscal policy might move the economy away from potential GDP instead of toward potential GDP is that

it is difficult to know whether real GDP is above or below potential GDP.

Discretionary fiscal policy is handicapped by

law-making time lags, estimation of potential GDP, and economic forecasting

An increase in taxes on labor income shifts the labor supply curve ________, and the ________.

leftward; after-tax wage rate falls

The national debt is the amount

of debt outstanding that arises from past budget deficits.

Automatic stabilizers are defined as

policy that stabilizes without the need for action by the government.

Needs-tested spending is defined as

spending on programs for people qualified to receive benefits.

The government has a budget surplus if

tax revenues are greater than outlays.

Looking at the supply-side effects on aggregate supply shows that a tax hike on labor income

Both answers A and B are correct.

The law-making time lag is best described as the time that it takes

Congress to PASS laws needed to change taxes or spending.

Suppose that the government increases spending more than is necessary to close a recessionary gap. What is the MOST likely result?

Inflation will increase

Do economists believe that the budget should be balanced each fiscal year?

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.

Do automatic fiscal stabilizers eliminate business cycles?

No, but they do moderate business cycles.

Suppose the government increases taxes by more than is necessary to close an inflationary gap. What is the MOST likely result?

The economy will move into a recession.

When tax revenues equal government outlays, the situation is referred to as

a balanced budget

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 sum of money the government owes

In 2009, Congress passed tax laws to reduce income tax rates for some taxpayers. This action is called

a discretionary fiscal policy

The crowding out effect refers to the ________ from ________ in the government's budget deficit.

decrease in investment; an increase

Suppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

decrease; expansionary; increase

An increase in the income tax ________ potential GDP by shifting the labor ________ curve ________.

decreases; supply; leftward

If tax revenues are $230 billion and the government's outlays are $235 billion, then the budget

deficit is $5 billion and government debt will increase by $5 billion

The government collects tax revenues of $100 million and has $105 million in outlays. The budget balance is a

deficit of $5 million

If fiscal stimulus creates a large budget ________, then in the long run economic growth ________.

deficit; decreases

An example of automatic fiscal policy is

expenditure for unemployment benefits increasing as economic growth slows.

When the government's expenditures exceed its tax revenues, the budget

has a deficit and the national debt is increasing

The use of discretionary fiscal policy is hampered by i. difficulty of estimating the level of potential GDP. ii. lack of accuracy of economic forecasts. iii. the small impact tax cuts and increases in government expenditure have on aggregate

i and ii

Transfer payments include i. social security benefits. ii. medicare and medicaid benefits. iii. unemployment benefits

i, ii, and iii.

After passage of the stimulus in 2009 government borrowing _____, and interest rates_____.

increased; remained very low

Induced taxes are defined as taxes

that vary with real GDP.

What two parts of the government determine the federal budget?

the Congress and the President

In order for the United States to use discretionary fiscal policy to deal with a recessionary gap

time must pass in order for Congress to decide what taxes and government programs to change.

Neoclassical economists argue that expansionary fiscal policy:

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