CH 13 ECON

For a person who thinks the public sector is too large, the fiscal options for ending severe demand-pull inflation would include

a cut in government spending

What type of tax system would have the most built-in stability?

A progressive tax because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes.

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.

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

For a person who wants to preserve the size of government, the fiscal options for ending severe demand-pull inflation would include

an increase in taxes

The Council of Economic Advisers (CEA) advises the president on

economic matters and provides recommendations for discretionary fiscal policy action.

The "ratchet effect" makes anti-inflationary policy

more difficult

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

To fight a recession, the president orders 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

Distracted by a war that is going badly, inflation reaches 8 percent before politicians take notice.

recognition lag

The government's fiscal policy options for ending severe demand-pull inflation include

reducing government spending, increasing taxes, or both.

Built-in (or automatic) stabilizers work by changing ______ so that changes in GDP are reduced.

taxes and government payouts

If the annual interest payments on the debt sharply increased as a percentage of GDP,

the government would have to use tax revenues or go deeper into debt