Chapter 8: Fiscal Policy

To understand the quantitative significance of the public debt relative to the economy, it should be:

Measured as a percentage of GDP

The time which 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

Incurring an internal debt to finance a war does not pass the cost of the war on to future generations because:

The opportunity cost of wartime expenditures was borne by the generation that lived during the war

The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is .2. What would be the full increase in real GDP from the change in government spending assuming that the aggregate supply curve is horizontal across the range of GDP being considered?

$10 billion

If the Congress passes legislation to decrease government spending to control demand-pull inflation, then this would be an example of a(n):

Contractionary fiscal policy

Which fiscal policy would be the most expansionary?

A $40 billion increase in government spending

If the cyclically adjusted budget shows a deficit of about $100 billion and the actual budget shows a deficit of about $150 billion over a several-year period, it can be concluded that there is a:

Cyclical deficit

One reason the public debt will not bankrupt the Federal government is that the:

Debt can be refinanced by selling new bonds

Refer to the above graph. The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation?

Decrease aggregate demand by increasing taxes

The set of fiscal policies that would be most contractionary would be a(n):

Decrease in government spending and an increase in taxes

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

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 government budget deficit occurs when government expenditures are:

Greater than government revenues

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with the goal of achieving full employment?

Increase government spending and decrease taxes

In an economy, the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment. If the MPC is .9, then it could: (Hint: Divide $60B by the multiplier to find out how much spending is needed.)

Increase government spending by $6 billion

Increased government spending for investments such as highways or harbors financed by increasing the public debt would most likely:

Increase the amount of public capital stock in the future

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

One important consequence of the public debt in the United States is that:

It transfers a portion of real output to foreign nations

Refer to the above data. Assume that Year 1 is the first year for this economy and Year 5 is the current year. What is the public debt in this economy?

NOT $150 billion

If the cyclically adjusted budget deficit increases from $200 billion to $250 billion and GDP remains constant over the two years:

NOT Fiscal policy is neutral Cyclical deficit: decline in tax revenues???

In an economy, the government wants to increase aggregate demand by $36 billion at each price level to increase real GDP and reduce unemployment. If the MPC is .75, then it could: (Hint: Recall that only 75% of the tax cut will be spent according to our MPC. To find out how much larger the tax cut will have to be divide the total amount of additional spending needed by .75.)

NOT Increase government spending by $12 billion

The public debt is the:

NOT Ratio of all past deficits to all past surpluses

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

In an aggregate demand and aggregate supply graph, an expansionary fiscal policy can be illustrated by a:

Rightward shift in the aggregate demand curve

A government economist states that: "The collection of personal income tax revenues automatically falls during a recession." This statement best describes how the progressive income tax system:

Serves as an automatic stabilizer for the economy

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary the:

Smaller is the economy's MPS

Fiscal policy is enacted through changes in:

Taxation and government spending

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 "administrative lag" that occurs between the:

Time the need for the fiscal action is recognized and the time that the action is taken