Chapter 13
As a percentage of potential GDP, the largest actual budget deficit occurred in which year?
2009
Which fiscal policy would be the most expansionary?
A $40 billion increase in government spending
Which set of fiscal policies would tend to offset each other?
A decrease in government spending and taxes
Which combination of fiscal policy actions would most stimulate an economy in a deep recession?
Decrease in taxes and increase in government spending
Which combination of fiscal policy actions would be most contractionary for an economy experiencing severe demand-pull inflation?
Increase in taxes and decrease in government spending
Which combination of fiscal policy actions would most likely be offsetting?
Increase in taxes and government spending
Which of the following are contractionary fiscal policies?
Increased taxation and decreased government spending
What real or potential economic problem is posed by the public debt and its growth?
It may crowd out investment in new capital goods
Which of the following best describes the idea of a political business cycle?
Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections
Which group has a direct responsibility for providing analysis, advice, and assistance to the U.S. president on economic matters?
The Council of Economic Advisors
Which of the following statements is most accurate about fiscal policy since the end of the Great Recession?
The cyclically adjusted budget remained in deficit and those deficits became smaller from 2009 to 2015, but fiscal policy remained expansionary
Which is regarded as an automatic stabilizer in the economy?
The progressive income tax
If the Congress passes legislation to decrease government spending to control demand-pull inflation, then this would be an example of:
a contractionary fiscal policy
If the cyclically adjusted budget shows a deficit of about $100 billion and the actual budget shows a deficit of about $150 billion, it can be concluded that there is:
a cyclical deficit
Proponents of the notion of a "political business cycle" suggest that:
a possible cause of economic fluctuations is due to the use of fiscal policy for political purposes
In the United States, income taxes and transfer payments:
act as automatic stabilizers for fluctuations in income
The lag between the time the need for fiscal action is recognized and the time action is taken is referred to as the:
administrative lag
The cyclically adjusted deficit is the difference between annual government expenditures and tax revenues that would have occurred if the economy was:
at full employment
When government tax revenues change automatically and in a countercyclical direction over the course of the business cycle, this is an example of:
built-in stability
Discretionary fiscal policy refers to:
changes in taxes and government expenditures made by Congress to stabilize the economy
In year 1, the actual budget deficit was $150 billion and the cyclically adjusted deficit was $125 billion. In year 2, the actual budget deficit was $125 billion and the cyclically adjusted deficit was $100 billion. GDP was $1000 billion in year 1 and $1005 billion in year 2. It can be concluded that fiscal policy from year 1 to year 2 was:
contractionary
Assume that the economy is in a recession and there is a budget deficit. A strict balanced budget amendment that would require the federal government to balance its budget during a recession would be:
contractionary and worsen the effects of the recession
If the Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n):
contractionary fiscal policy
When the federal government cuts taxes and increases spending to stimulate the economy during a period of recession, such actions are designed to be:
countercyclical
If the cyclically adjusted budget shows a deficit of about $200 billion and the actual budget shows a deficit of about $250 billion over a several-year period, it can be concluded that there is a:
cyclical deficit
Another term for the full-employment budget is the:
cyclically adjusted budget
With a regressive tax system, as the level of income increases in an economy, the average tax rate will:
decrease
Which is an example of an automatic stabilizer? As real GDP decreases, income tax revenues:
decrease and transfer payments increase
A contractionary fiscal policy can be illustrated by a(n):
decrease in aggregate demand
The set of fiscal policies that would be most contractionary would be a(n):
decrease in government spending and an increase in taxes
The crowding-out effect works through interest rates to:
decrease the effectiveness of expansionary fiscal policy
Actions by the federal government that decrease the progressivity of the tax system:
decrease the effects of automatic stabilizers
The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending would:
decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy
Due to automatic stabilizers, when income rises, government transfer spending:
decreases and tax revenues increase
Crowding out is the notion that:
deficit financing will increase the demand for money, increase the interest rate, and reduce the level of investment spending in the economy
Countercyclical discretionary fiscal policy calls for:
deficits during recessions and surpluses during periods of demand-pull inflation
When the federal government takes action to change taxes and spending to stimulate the economy, such policy is:
discretionary
In year 1, the actual budget deficit was $200 billion and the cyclically adjusted deficit was $150 billion. In year 2, the actual budget deficit was $225 billion and the cyclically adjusted deficit was $175 billion. GDP was $1000 billion in year 1 and $1005 billion in year 2. It can be concluded that fiscal policy from year 1 to year 2 was:
expansionary
If Congress passes legislation to cut taxes and increase government spending to counter the effects of a severe recession, this would be an example of a(n)
expansionary fiscal policy
If the Congress passes legislation to cut taxes to counter the effects of a severe recession, then this would be an example of a(n):
expansionary fiscal policy
If the Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n):
expansionary fiscal policy
A federal budget deficit exists when:
federal government spending exceeds tax revenues
Changes in government spending and tax revenues for the purpose of achieving a full employment and noninflationary level of domestic output is called:
fiscal policy
When the federal government uses taxation and spending actions to stimulate the economy, it is conducting:
fiscal policy
If the cyclically adjusted surplus as a percentage of GDP is zero one year and 2 percent of GDP the next year, it can be concluded that:
fiscal policy is contractionary
If the cyclically adjusted budget deficit increases from $200 billion to $250 billion and GDP remains constant over the two years:
fiscal policy is expansionary
If the cyclically adjusted deficit as a percentage of GDP is zero in one year and 1 percent of GDP the next year, it can be concluded that:
fiscal policy is expansionary
The cyclically adjusted deficit as a percentage of GDP is 1 percent in year 1. This deficit becomes a surplus of 1 percent of GDP in year 2. It can be concluded from year 1 to year 2 that:
fiscal policy was contractionary
The cyclically adjusted deficit as a percentage of GDP is 2 percent in year 1. This deficit becomes 1 percent of GDP in year 2. It can be concluded from year 1 to year 2 that:
fiscal policy was contractionary
The cyclically adjusted surplus as a percentage of GDP is 1 percent in year 1. This surplus becomes 2 percent of GDP in year 2. It can be concluded from year 1 to year 2 that:
fiscal policy was contractionary
The cyclically adjusted deficit as a percentage of GDP is 2 percent in year 1. This deficit becomes 3 percent of GDP in year 2. It can be concluded from year 1 to year 2 that:
fiscal policy was expansionary
The cyclically adjusted surplus as a percentage of GDP is 1 percent in year 1. This surplus becomes a deficit of 2 percent of GDP in year 2. It can be concluded from year 1 to year 2 that:
fiscal policy was expansionary
The cyclically adjusted budget is also called the:
full-employment budget
The crowding-out effect arises when:
government borrows in the money market, thus increasing interest rates and decreasing net investment spending
The crowding-out effect of expansionary fiscal policy suggests that:
government spending is increasing at the expense of private investment
The more progressive the tax system, the:
greater is the built-in stability for the economy
Automatic stabilizers smooth fluctuations in the economy because they produce changes in the government's deficit that:
help offset changes in GDP
With a progressive tax system, as the level of income increases in an economy, the average tax rate will:
increase
An expansionary fiscal policy can be illustrated by a(n):
increase in aggregate demand
The combination of fiscal policies that would reinforce each other and be most expansionary would be a(n):
increase in government spending and a decrease in taxes
Built-in stabilizers:
increase the government's deficit during a recession
Assume that when there is no crowding out, an increase in government spending increases GDP by $100 billion. If there had been partial crowding out, then GDP would have:
increased by less than $100 billion
If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be:
increased government spending or decreased taxation, or a combination of the two actions
The crowding-out effect of expansionary fiscal policy suggests that:
increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment
The crowding-out effect suggests that:
increases in government spending may raise the interest rate and thereby reduce investment
Which cause-and-effect chain would best explain the reason for a crowding-out effect? An expansionary fiscal policy:
increases interest rates that decrease private investment spending
When aggregate demand shifts because of expansionary fiscal policy, then the impact of the fiscal policy for:
increasing GDP will be weakened if crowding out occurs
Discretionary fiscal policy is so named because it:
involves specific changes in T and G undertaken expressly for stabilization at the option of Congress
Contractionary fiscal policy is so named because it:
is aimed at reducing aggregate demand and thus achieving price stability
Expansionary fiscal policy is so named because it:
is designed to expand real GDP
One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy:
is not subject to the timing problems of discretionary policy
In an aggregate demand and aggregate supply graph, a contractionary fiscal policy can be best illustrated by a:
leftward shift in the aggregate demand curve
Fiscal policy refers to the:
manipulation of government spending and taxes to stabilize domestic output, employment, and the price level
When changes to taxes and spending occur in the economy without explicit action by the federal government, such policy is:
nondiscretionary
If government tax revenues change automatically and in a countercyclical direction over the course of the business cycle, this would be called a(n):
nondiscretionary fiscal policy
If you are told that the government had an actual budget deficit of $50 billion, then you would:
not be able to determine the direction of fiscal policy from the information given
An expansionary fiscal policy may be:
partially offset by the crowding-out effect
The United States is experiencing recession, so Congress adopts an expansionary fiscal policy. State governments face a budget shortfall and raise taxes to balance their budgets. The actions of state governments would:
partially offset the fiscal policy
The political business cycle refers to the possibility that:
politicians will manipulate the economy to enhance their chances of being reelected
There is general agreement among economists that a proposed fiscal policy should be evaluated for its:
potential positive and negative effects on long-run productivity growth
The Council of Economic Advisers gives economic advice to the:
president
Suppose the United States pursued an expansionary fiscal policy to stimulate its economy and eliminate a recession. The crowding-out effect suggests that:
private investment would decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy
As the economy declines, the collection of personal income tax revenues automatically falls. This relationship best describes how the progressive income tax system:
provides built-in stability for the economy
As the economy expands, the collection of personal income tax revenues automatically rises. This relationship best describes how the progressive income tax system:
provides built-in stability for the economy
The time that elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n):
recognition lag
In an aggregate demand and aggregate supply graph, an expansionary fiscal policy can be best illustrated by a:
rightward shift in the aggregate demand curve
If the government adopts an expansionary fiscal policy that requires more government borrowing in the money market, then interest rates are likely to:
rise and partially offset the effects of the fiscal policy
A new member of Congress notes that "[p]ersonal income tax collections automatically fall and transfers and subsidies automatically rise as national income declines." This observation best describes how the personal income tax, transfers, and subsidies:
serve as built-in stabilizers
One timing problem with fiscal policy to counter a recession is a "recognition lag" that occurs between the:
start of the recession and the time it takes to recognize that the recession has started
An economist who favors smaller government would recommend:
tax cuts during recession and reductions in government spending during inflation
If the economy is to have automatic stabilizers, when real GDP rises:
tax revenues should rise
Fiscal policy is enacted through changes in:
taxation and government spending
If the government wishes to increase the level of real GDP, it might reduce:
taxes
Assume the government purposely incurs a budget deficit that is financed by borrowing. As a result, interest rates rise and the amount of private investment spending declines. This illustrates:
the crowding-out effect
The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes:
the crowding-out effect
The actual and cyclically adjusted budgets will be equal when:
the economy is at full employment
One timing problem with fiscal policy to counter a recession is an "operational lag" that occurs between the:
time fiscal action is taken and the time that the action has its effect on the economy
One of the timing problems with fiscal policy is an "operational lag" that occurs between the:
time that fiscal action is taken and the time that action has an impact on output, employment, and the price level
One timing problem with fiscal policy to counter a recession is an "administrative lag" that occurs between the:
time the need for the fiscal action is recognized and the time that the action is taken
Whether crowding out occurs is most likely to depend on:
whether there is full employment in the economy