National Economy Chapter 13 questions and answers

Consumer spending will rise if

government transfers rise

The National Debt

grows when the government runs a deficit

During a recessionary gap

holding everything else constant, the budget deficit would increase

An expansionary fiscal policy either _________ government spending or ________ taxes

increases; decreases

When policy makers make a deliberate fiscal policy decision

it is called discretionary fiscal policy

If there is an inflationary gap, discretionary fiscal policy would likely involve action to

shift aggregate demand to the left

If there is a recessionary gap, discretionary fiscal policy would likely involve action to

shift aggregate demand to the right

When the unemployment rate increases, the budget

tends to move into deficit

If the marginal propensity to save is 0.25, investment spending is $700 million, and the government increases its purchases of goods and services by $100 million, then real GDP increases by

$400 million

If the marginal propensity to consume is .9, then the government spending multiplier has a value of

10

The basic equation of national income accounting shows: GDP = C + I + G + X - IM. When the government uses fiscal policy to make changes to taxes and transfers, this policy primarily affects

C

Increased government transfers constitute contractionary fiscal policy

False

Lower government transfers or higher taxes make a budget surplus smaller or a budget deficit larger

False

The Government Budget Balance Is

G-T-TR

In the basic equation of national income accounting, the government directly controls _____ and influences ___________

G; C and I

Transfer Payments are Payments that

Governments make to households although the government did not receive a good or service from the household

Some economists require that the budget be "balanced" each fiscal year. Is this correct?

No, a budget needs to be balanced on average; it can be in a deficit when there is a recession and offset by surpluses when the economy is doing well

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following would most likely be the end result?

The economy could move into a recession

Taxes increase as GDP rises. This is an example of an automatic stabilizer

True

Automatic stabilizers act like

automatic expansionary fiscal policy when the economy is in a recession

When the federal government finances a deficit, the government may

borrow funds

Fiscal policy that decreases aggregate demand is

contractionary

When government spending results in persistent deficits which result in the need for government to borrow thereby leading to a reduction in private investment, this is referred to as

crowding out

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

decrease taxes

Discretionary Fiscal Policy indicates

deliberate action by policy makers