EC. ch 13

Due to automatic stabilizers, when the nation's total income rises, government transfer spending

Decreases and tax revenues increase

Which combination of fiscal policy actions would most likely offset each other?

Increase taxes and government spending

Most economists believe that fiscal policy is

Not as good as monetary policy for month-to-month stabilization

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n)

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

a reduction in Federal tax rates on personal and corporate income

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to

increase government expenditures or reduce taxes

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

Which of the following would help a government reduce an inflationary output gap?

raise taxes, decrease government spending

The goal of expansionary fiscal policy is to increase

real gdp

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to

reduce government expenditures or increase taxes

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

reduce government expenditures or increase taxes

If the MPS in an economy is 0.4, government could shift the aggregate demand curve leftward by $50 billion by

reducing government expenditures by $20 billion.

A major advantage of the built-in or automatic stabilizers is that they

require no legislative action by Congress to be made effective.

An expansionary fiscal policy is shown as a

rightward shift in the economy's aggregate demand curve.

A specific reduction in government spending will dampen demand-pull inflation by a greater amount the

small is the economy's MPS

The political business cycle refers to the possibility that

there is more inflation during Democratic administrations than during Republican administrations

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. The operational lag of fiscal policy is reflected in event(s)

1 and 2

Which of the following fiscal policy actions is most likely to increase aggregate supply?

An increase in government spending on infrastructure that increases private sector productivity.

Refer to the figure. Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. If contractionary fiscal policy and accompanying multiplier effects move aggregate demand from AD2 to AD1, what will be the effect on real GDP and the price level?

B. Real GDP will fall to X and the price level will remain unchanged, assuming a ratchet effect occurs.

Which of the following statements is correct?

Built-in stability has eliminated the need for discretionary fiscal policy.

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to

Decrease in government spending and an increase in taxes

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 suggests that

Increases in government spending may reduce private investment

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

Which of the following represents the most expansionary fiscal policy?

a $10 billion increase in government spending

Assume that if there were no crowding out, an increase in government spending would increase GDP by $100 billion. If there had been partial crowding out, however, then GDP would have

contradictory fiscal policy

The group of three economists appointed by the president to provide fiscal policy recommendations is the

council of economic advisors

The intent of contractionary fiscal policy is to

decrease aggregate demand

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. The recognition lag of fiscal policy is reflected in events

decrease and transfer payments increase.

Which of the following is an example of built-in stability? As real GDP decreases, income tax revenues

decrease and transfer payments increase.

Discretionary fiscal policy will stabilize the economy most when

deficits are incurred during recessions and surpluses during inflations.

An appropriate fiscal policy for severe demand-pull inflation is

deficits during recessions and surpluses during periods of demand-pull inflation.

Built-in stability is synonymous with discretionary fiscal policy.

false

Demand-pull inflation can be restrained by increasing government spending and reducing taxes.

false

Expansionary fiscal policy is so named because it involves an expansion of the nation's money supply.

false

Suppose the price level is fixed, the MPC is 0.8, and the GDP gap is a negative $200 billion. To achieve full-employment output (exactly), government should

increase government expenditures by $40 billion.

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should

increase government expenditures by $50 billion.

The effect of a government surplus on the equilibrium level of GDP is substantially the same as

increase in saving

Refer to the accompanying graph. What combination would most likely cause a shift from AD1 to AD3?

increase tax and government spending

Assume that if there were no crowding out, an increase in government spending would increase GDP by $100 billion. On the other hand, if there had been full crowding out, then GDP would have

increased by less than $100 billion

Countercyclical discretionary fiscal policy calls for

increased by less than $100 billion

An economist who favored expanded government would recommend

increases in government spending during recession and tax increases during inflation

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should

reduce tax rates and/or increase government spending.

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to

reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will

shift AD curve to the left

If the government wishes to increase the level of real GDP, it might reduce

taxes

The so-called negative taxes are better known as

transfer payments

A contractionary fiscal policy shifts the aggregate demand curve leftward.

true

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing

a negative GDP gap

An appropriate fiscal policy for a severe recession is

decrease in tax

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 will

decrease, thus partially offsetting the fiscal policy.

Fiscal policy refers to the

deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.

If the MPC in the economy is 0.75, government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion.

true

The crowding-out effect arises when

Government borrows in the money market, thus causing an increase in interest rates

Fiscal policy is mainly undertaken by the Federal Reserve.

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by

increasing government spending by $4 billion.

If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by

increasing taxes by $20 billion

Discretionary fiscal policy refers to

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Discretionary fiscal policy is so named because it

involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.

A tax reduction of a specific amount will be more expansionary the

larger is the economy's MPC

A contractionary fiscal policy is shown as a

leftward shift in the economy's aggregate demand curve.

When changes in taxes and government spending occur in the economy without explicit action by Congress, such policy is called ______ fiscal policy.

nondiscretionary

Built-in stability means that

with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. The administrative lag of fiscal policy is reflected in events

1 and 2

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.

As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system

Serves as an automatic stabilizer for the economy

Refer to the figure. The economy is at equilibrium at point C, which is below potential output. What fiscal policy would increase real GDP?

Shift aggregate demand by increasing transfer payments

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.

The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand but also at the same time raising taxes to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is:

a mediocre and contradictory combination of tax and expenditure changes

Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward

an excess of government expenditures over tax receipts

Refer to the diagram, in which Qf is the full-employment output. The shift in the aggregate demand curve from AD3 to AD2 could result from which of the following fiscal policy actions?

an increase in government spending

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n)

contractionary fiscal policy

Refer to the figure. Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. Because of the ratchet effect,

contractionary fiscal policy that shifts aggregate demand to AD1 will cause real GDP to fall below its full employment level.

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with

contradictory fiscal policy

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes

crowding-out effect

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 closing the GDP gap here?

decrease government spending and increase taxes

Refer to the figure. Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. If the government wants to move the level of real GDP back to Y and reduce demand-pull inflation, in the presence of a ratchet effect, it should

enact a contractionary fiscal policy that will shift aggregate demand to the left, but not as far as AD1.

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

false

Refer to the figure. The economy is at equilibrium at point B. What would expansionary fiscal policy do?

move the economy from point B towards point A.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it is experiencing

positive gdp gap

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should

reduce by $8 billion

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD2 describes the current situation, appropriate fiscal policy would be to

reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2

An economist who favors smaller government would recommend

tax cuts during recession and reductions in government spending during inflation

Which of the following represents the most contractionary fiscal policy?

$30 billion decrease in government spending

Refer to the accompanying graph. What combination would most likely cause a shift from AD1 to AD2?

A decrease in taxes and an increase in government spending

Refer to the diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at

AD3

Refer to the diagram, in which Qf is the full-employment output. An expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at

AD3

Automatic stabilizers smooth fluctuations in the economy because they produce changes in the government's budget that

Help offset changes in GDP

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by

decreasing taxes by $25 billion

Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2,

government should undertake neither an expansionary nor a contractionary fiscal policy.

The crowding-out effect of expansionary fiscal policy suggests that

government spending increases at the expense of private investment.

Discretionary fiscal policy is often initiated on the advice of the

council of economic advisors

Match each of the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. ________________ a. 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. _____________ b. Distracted by a war that is going badly, inflation reaches 8 percent before politicians take notice. _________ c. A sudden recession is recognized by politicians, but it takes many months of political deal making before a stimulus bill is finally approved. ___________ d. 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. ___________

a) operational b) recognition c) administration d) operational

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with

an expansionary fiscal policy.

When the Federal government uses taxation and spending actions to stimulate the economy, it is conducting

fiscal policy

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should

increase tax rates and/or reduce government spending.

Refer to the graph. Assume that the economy initially has a price level of P1 and output level Q1. If the government implements expansionary fiscal policy, and the full multiplier effect is felt, it will bring the economy to

increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.

Which of the following best describes the built-in stabilizers as they function in the United States?

p1 and Q3.