Chapter 11
Which of the following best expresses the central idea of countercyclical fiscal policy?
Deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
Which of the following is an appropriate fiscal policy to address the inflation that occurs when the economy is above potential GDP?
Increase taxes to reduce aggregate demand.
Which of the following economists is most responsible for the view that a macro policy designed to balance the budget will contribute to economic instability?
John Maynard Keynes
Suppose long-run equilibrium is present and the government budget is in balance. Which of the following would be most likely to occur if the economy falls into a recession?
a budget deficit
According to the Keynesian view, if policy makers thought the economy was about to enter an inflationary boom, which of the following would be most appropriate?
a tax increase
If the federal government runs a budget deficit in order to finance an increase in spending, where do the funds to finance the spending come from?
additional bonds issued by the U.S. Treasury
The crowding-out effect stresses that
additional government borrowing to finance a larger deficit will increase the demand for loanable funds, causing real interest rates to rise.
According to the Keynesian view, which of the following would most likely cause an increase in aggregate demand?
an increase in the budget deficit
The distinction between discretionary fiscal policy and the use of automatic stabilizers is that
automatic stabilizers, once adopted, are built into the structure of the economy.
Supply-side economics stresses that
changes in marginal tax rates exert important effects on real output and employment
Which of the following provides the best information about the direction of the government's fiscal policy?
changes in the size of the federal government's budget deficit or surplus
Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called
countercyclical fiscal policy
Changes in government spending and/or taxes as the result of legislation, is called
discretionary fiscal policy.
When the federal government is running a budget deficit,
government expenditures exceed government revenues
A balanced budget is present when
government revenues equal government expenditures.
When the federal government is running a budget surplus,
government revenues exceed government expenditures
If the federal government is running a budget surplus,
it will be able to reduce its outstanding debt
Automatic stabilizers are government programs that tend to
reduce the ups and downs in aggregate demand without legislative action
Federal budget deficits generally grow during recessions because
tax revenues decrease while transfer payments increase
If the federal government is running a budget deficit,
the U.S. Treasury will finance the deficit by issuing additional bonds.
The crowding-out effect refers to the tendency of
the additional borrowing accompanying larger budget deficits to increase interest rates and reduce private spending.
If the government owes $4,500 billion and then borrows $300 billion more this year,
the debt is $4,800 billion and the deficit is $300 billion
The primary tool of fiscal policy is
the federal budget
The crowding-out effect indicates that budget deficits
will lead to additional borrowing and higher interest rates that will reduce the level of private spending.