ECON chapter 13

Which of the following statements is true when considering time​ lags?

Time lags in fiscal policy can be extremely long and may take several years before any impact is felt.

The purpose of automatic stabilizers is to

lessen the impact of unemployment in a recession and slowdown inflation during an expansion.

Built-in stabilizers automatically tend to ________ changes in disposable income resulting from changes in overall business activity.

moderate

Which of the following government expenditures is least likely to result in a direct expenditure​ offset?

purchasing military aircraft

To address a situation in which there is a _________ gap and the economy is operating at less than​ long-run aggregate supply ​(LRAS​), the government can _______ its spending. This policy action shifts the aggregate demand curve to the​ right, causing the equilibrium level of real GDP per year to increase.

recessionary/ increase

Time lags of various sorts reduce the effectiveness of fiscal policy. The_______ time lag is the time required to gather information about the current state of the economy.

recognition

There are several time lags involved when fiscal policy is applied. The first hurdle faced by a government is

recognizing that the economy is facing a problem that could be solved by applying fiscal policy.

Automatic stabilizers

cause changes in the economy without the action of Congress and the President.

One of the advantages of fiscal policy is that it

generates a psyche of safety for consumers and investors because they know the government has the ability to use it.

The government reduces its taxes without decreasing its​ expenditures; to cover the resulting budget​ deficit, it issues more​ bonds, thereby pushing up the market interest rate and discouraging private planned investment spending. This is an example of

indirect crowding out from a fiscal policy action.

To address a situation in which there is an _______ ​gap, the government can its spending and cause the aggregate demand curve to shift to the​ left, which reduces the equilibrium level of real GDP per year.

inflationary/ decrease

According to the Laffer​ curve, as the tax rate continues to​ increase, total tax revenues

initially rise but eventually fall.

The existence of fiscal policy may have a __________ effect on consumers and investors.

soothing

Changes in marginal tax rates may cause _____________ effects if a reduction in marginal tax rates induces enough additional​ work, saving, and investing. Government tax receipts can actually increase. This is called ____________ economics.

supply side/ supply side

If the Ricardian equivalence theorem is not​ relevant, then an​ income-tax-rate cut

will result in a multiple times higher increase in equilibrium real GDP in the short​ run; however, a​ tax-rate reduction will reduce the​ automatic-stabilizer properties of the tax​ system, so equilibrium real GDP would be less stable.

Which of the following economic theories can be used to account for this apparent​ non-relationship between real consumption and real disposable income in the late spring of​ 2008?

the permanent income hypothesis

An increase in goverment spending without raising taxes creates additional government borrowing from the private or foreign sectors.

true

The federal progressive tax system is considered an automatic​ stabilizer, and may reduce the extent of negative economic fluctuations by stimulating aggregate demand.

true

Unemployment compensation payments help stabilize aggregate demand during business fluctuations by reducing changes in​ people's disposable income.

true

When there is​ ________ gap, the government would increase taxes in an attempt to shift the aggregate demand curve to the​ ________.

an​ inflationary; left

The Laffer curve indicates

-an inverse relationship between tax rates and tax revenues. -a positive relationship between tax rates and tax revenues.

Fiscal policy is likely to be more effective

-when there are less offsetting reductions in private sector spending. -during abnormal times as opposed to more normal times. -when government borrowing does not increase interest rates substantially. -All of the above.

​Currently, a​ government's budget is balanced. The marginal propensity to consume is 0.90. The government has determined that each additional ​$1010 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.20 percentage points. It has also determined that every 0.10 ​(​one-tenth​) ​percentage-point change in the market interest rate generates a change in planned investment expenditures equal to ​$4 billion.​ Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price​ level, it must generate a net rightward shift in the aggregate demand curve equal to ​$250 billion.

125

​Currently, a​ government's budget is balanced. The marginal propensity to consume is 0.75. The government has determined that each additional ​$10 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.10 percentage points. It has also determined that every 0.10 ​(​one-tenth​) ​percentage-point change in the market interest rate generates a change in planned investment expenditures equal to ​$1 billion.​ Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price​ level, it must generate a net rightward shift in the aggregate demand curve equal to ​$200 billion.

55.56

You are a member of Congress. The economy is currently experiencing an inflationary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the​ economy?

A decrease in government spending and an increase in taxes

Which of the following is not an automatic​ stabilizer?

Defense spending.

The US government decides to follow expansionary fiscal policy. Congress is meeting in a late session on the last day before it breaks for vacation. One of the Representatives makes a​ statement, "It does not matter what we spend the money​ on, let's just pass the bill and go​ home." Evaluate the accuracy of the​ Representative's belief by choosing either the correct affirmation or rebuttal below.

It does matter what the government decides to purchase with the additional spending.

The ___________ theorem holds that an increase in the government budget deficit has no effect on aggregate demand because individuals anticipate that their future taxes will increase and therefore save more today to pay for them.

Ricardian equivalence

Congress votes to fund a new jobs program designed to put unemployed workers to work. This is an example of

a discretionary fiscal policy

Under powers authorized by an act of​ Congress, the president decides to authorize an emergency release of funds for spending programs intended head off economic crises. This is an example of

a discretionary fiscal policy

The Federal Reserve decides to reduce the quantity of money in circulation in an effort to slow inflation. This is an example of

a monetary policy

Government expenditures fund construction of a​ high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building. This is an example of

direct expenditure offsets to a fiscal policy action.

Fiscal policy refers to

discretionary changes in government spending and taxes.

Fiscal policy time lags tend to be of a fixed length.

false

The Ricardian equivalence theorem proposes that an increase in the government budget deficit​ ________ aggregate demand.

has no effect

Another year and a half elapses following passage of the government spending boost. The government has undertaken no additional policy​ actions, nor have there been any other events of significance.​ Nevertheless, by the end of the second​ year, real GDP has returned to its original​ level, and the price level has increased sharply. This possibly happened because

the LRAS was​ vertical; the increase in government spending raised aggregate demand and resulted in only a rise in the price level in the long run.

Given the existence of time​ lags, there is potential danger in using fiscal policy. Which of the following outcomes could occur because of the existence of such time​ lags?

Each of these scenarios are potential outcomes because of the existence of time lags.

Which of the following statements is​ correct?

Governments have a difficult time​ fine-tuning the economy by using fiscal policy because there are several time lags and these are often variable.

Currently the government has a balanced budget. It decides to follow an expansionary fiscal policy of reducing taxes by​ $100 billion. Which of the following statements bests describes the Ricardian Equivalence Theorem under these​ conditions?

Households save more than anticipated.

How do automatic stabilizers ​work?

When a decline in national income occurs there will be a reduction in income tax collections and an increase in unemployment compensation and welfare payments muting the reduction in planned expenditures that would have otherwise resulted.

When the federal government finances increased spending by additional​ borrowing, interest rates will​ ________ which induces firms to​ ________ planned investment spending.

increase, reduce

Indirect crowding out occurs because of an interest rate effect in which the​ government's efforts to finance its deficit spending cause interest rates to ______ thereby crowding out private investment and​ spending, particularly on cars and houses. This is called the ​crowding-out effect.

increase

A progressive tax system is one in which the tax rates

increase as income increases.

In the extreme case of direct expenditure offsets the

increase in government expenditures are matched by a decrease in consumption.

As real GDP​ rises, tax revenues tend to​ ________ and government transfers tend to​ ________.

rise/fall

During normal​ times, fiscal policy probably achieves most of its impact through

the workings of automatic stabilizers.

In May and June of​ 2008, the federal government issued​ one-time tax rebateslong dash—checks returning a small portion of taxes previously paidlong dash—to millions of U.S.​ residents, and U.S. real disposable income temporarily jumped by nearly​ $500 billion. ​However, household real consumption spending did not increase in response to the​ short-lived increase in real disposable income because

the​ one-time tax rebate failed to increase the​ recipients' permanent income which determines an​ individual's current consumption.

The Ricardian Equivalence Theorem implies that expansionary fiscal policy that creates a budget deficit will result in

no changes in aggregate demand

Increased government spending crowds out investment due to

higher interest rates.

​Currently, a​ government's budget is balanced. The marginal propensity to consume is .90. The government has determined that each additional ​$10 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by .20 percentage points. It has also determined that every 0.10 ​(​one-tenth​) ​percentage-point change in the market interest rate generates a change in planned investment expenditures equal to ​$22 billion.​ Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price​ level, it must generate a net rightward shift in the aggregate demand curve equal to ​$250 billion.

14.67 billion

​Currently, a​ government's budget is balanced. The marginal propensity to consume is 0.75. The government has determined that each additional ​$1010 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.20 percentage points. It has also determined that every 0.10 ​(​one-tenth​) ​percentage-point change in the market interest rate generates a change in planned investment expenditures equal to ​$4 billion.​ Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price​ level, it must generate a net rightward shift in the aggregate demand curve equal to ​150 billion.

187.50

​Currently, a​ government's budget is balanced. The marginal propensity to consume is 0.90. The government has determined that each additional ​$10 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.20 percentage points. It has also determined that every 0.10 ​(​one-tenth​) ​percentage-point change in the market interest rate generates a change in planned investment expenditures equal to ​$2 billion.​ Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price​ level, it must generate a net rightward shift in the aggregate demand curve equal to ​$150 billion.

25

​Currently, a​ government's budget is balanced. The marginal propensity to consume is 0.90. The government has determined that each additional ​$10 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.20 percentage points. It has also determined that every 0.10 ​(​one-tenth​) ​percentage-point change in the market interest rate generates a change in planned investment expenditures equal to ​$2 billion.​ Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price​ level, it must generate a net rightward shift in the aggregate demand curve equal to ​$200 billion.

33.33

​Currently, a​ government's budget is balanced. The marginal propensity to consume is 0.80. The government has determined that each additional ​$10 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.10 percentage points. It has also determined that every 0.10 ​(​one-tenth​) ​percentage-point change in the market interest rate generates a change in planned investment expenditures equal to ​$22 billion.​ Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price​ level, it must generate a net rightward shift in the aggregate demand curve equal to ​$200 billion.

50

​Currently, a​ government's budget is balanced. The marginal propensity to consume is 0.80. The government has determined that each additional ​$10 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.10 percentage points. It has also determined that every 0.10 ​(​one-tenth​) ​percentage-point change in the market interest rate generates a change in planned investment expenditures equal to ​$1 billion.​ Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price​ level, it must generate a net rightward shift in the aggregate demand curve equal to ​$250 billion.

55.56

​Currently, a​ government's budget is balanced. The marginal propensity to consume is 0.75. The government has determined that each additional ​$10 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.10 percentage points. It has also determined that every 0.10 ​(​one-tenth​) ​percentage-point change in the market interest rate generates a change in planned investment expenditures equal to ​$1 billion.​ Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price​ level, it must generate a net rightward shift in the aggregate demand curve equal to ​$250 billion.

69.44

​Currently, a​ government's budget is balanced. The marginal propensity to consume is .75. The government has determined that each additional ​$10 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.10 percentage points. It has also determined that every 0.10 ​(​one-tenth​) ​percentage-point change in the market interest rate generates a change in planned investment expenditures equal to ​$22 billion.​ Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price​ level, it must generate a net rightward shift in the aggregate demand curve equal to ​$250 billion.

78.13

​Currently, a​ government's budget is balanced. The marginal propensity to consume is 0.75. The government has determined that each additional ​$10 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.10 percentage points. It has also determined that every 0.10 ​(​one-tenth​) ​percentage-point change in the market interest rate generates a change in planned investment expenditures equal to ​$4 billion.​ Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price​ level, it must generate a net rightward shift in the aggregate demand curve equal to ​$200 billion.

83.33

You are a member of Congress. The economy is currently experiencing a recessionary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the​ economy?

An increase in government spending and a decrease in taxes

Suppose that the economy is presently operating at full employment. If there is an increase in national​ income, which of the following will occur​ automatically?

An increase in tax revenues.

Consider the following​ diagram, in which the current​ short-run equilibrium is at point A.

At point​ A, the economy has a recessionary gap. If the marginal propensity to save equals 0.200.20​, calculate the change in government spending that could eliminate the gap $.20 trillion. ​

___________ occur when government spending competes with the private sector and is increased. A direct​ crowding-out effect may occur.

Direct expenditure offsets

Although discretionary fiscal policy may not necessarily be a useful policy tool in normal times because of time​ lags, it may work well during _______ ​times, such as depressions and wartimes.

abnormal

The ________ time lag is the time between recognition of a perceived need for a policy response and implementation of that response.

action

The time between recognizing an economic problem and implementing policy to solve it is called the​ ________ time lag.

action

The Congressional​ meetings, discussions,​ arguments, debates over fiscal policy and the subsequent signing or vetoing by the President of a bill are part of the

action time lag.

When an economist is using the term​ "discretionary" as in discretionary​ spending, they are referring to the

amount of government spending decided upon by Congress or the​ government's ruling body.

A recession​ occurs, and​ government-funded unemployment compensation is paid to​ laid-off workers. This is an example of

an automatic fiscal stabilizer.

Two ___________, or​ built-in, stabilizers are the progressive income tax and unemployment compensation.

automatic

When there is​ ________ gap, the government would increase spending in an attempt to shift the aggregate demand curve to the​ ________.

a​ recessionary; right

Suppose that Congress and the president decide that economic performance is weakening and that the government should​ "do something" about the situation. They make no tax changes but do enact new laws increasing government spending on a variety of programs. a. Prior to the congressional and presidential​ actions, careful studies by government economists indicated that the direct multiplier effect of a rise in government expenditures on equilibrium real GDP is equal to 6. In the 12 months since the increase in government​ spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount. This could have happened because of all the following except

a​ supply-side effect.

When there is an economic​ downturn, Congress and the President use fiscal policy to stabilize real GDP. But the conduct of the fiscal policy involves several time​ lags, such as the recognition time lag that causes a delay in identification of the economic​ problem, the action time lag that is caused by the delay in Congressional approval of the​ policy, and the effect time lag that arises because policy actions take time to exert their full effects on the economy. These time lags could actually cause discretionary fiscal policy to

destabilize real GDP because by the time a policy has begun to have its​ effects, the economy might already be recovering and the policy action might push real GDP up faster than​ intended, thereby making real GDP less stable.

The government provides a subsidy to help keep an existing firm​ operating, even though a group of investors otherwise would have provided a cash infusion that would have kept the company in business. This is an example of

direct expenditure offsets to a fiscal policy action.

Fiscal policy is likely to be least effective

during normal economic times.

The ___________ time lag is the time between implementation of a policy and the​ policy's results.

effect

The government just passed a new tax bill that will be applied to the economy next year. Most people will not immediately feel the impact of this new tax bill and not adjust their​ W-2 tax forms. The impact of the new tax bill​ won't become apparent to them until the following April when their tax bills are due. This problem is referred to as the

effect time​ lag, and it makes it difficult to use discretionary fiscal policy to close a recessionary gap.

According to the supply side economists​ a(n) increase in marginal tax rates will

either increase or decrease the amount of leisure time chosen by workers.

Fiscal policy is defined as making discretionary changes in government ______ or ________ to achieve such national goals as high employment or reduced inflation.

expenditures/ taxes

Discretionary fiscal policy is generally more effective during relatively stable economic times than during times of economic crisis.

false

​One-time tax rebates generally result in significant changes in consumer spending.

false

Changes in taxes can have similar effects on the equilibrium rate of real GDP and the price level. If there is an inflationary​ gap, an _________ in taxes can lead to a decrease in the equilibrium level of real GDP per year. In​ contrast, if there is a recessionary​ gap, a _______ in taxes can increase equilibrium real GDP per year.

increase/ decrease

Expansionary fiscal policy that creates a budget deficit can lead to crowding out. This crowding out effect is exhibited by

increased government expenditures and decreased investment.