ECON EXAM 3

The modern consensus view of fiscal policy stresses a. that the federal government should always balance its budget. b. that offsetting factors make fiscal policy much less effective than the Keynesian view suggested. c. that proper timing of fiscal policy is very difficult to achieve, rendering fiscal policy less useful as a stabilization tool. d. that both b and c are true.

D

discretionary fiscal policy

a change in laws that result in change in government revenue or spending

expenditure multiplier

1/(1-MPC)

countercyclical policy

- used to offset fluctuations in aggregate demand - tends to move the economy in the opposite direction from the forces of the business cycle

Automatic stabilizers are government programs that tend to a. reduce the ups and downs in aggregate demand without legislative action. b. bring expenditures and revenues automatically into balance without legislative action. c. signal Congress that legislative changes are needed. d. increase tax collections automatically during a recession.

A

Keynesian countercyclical budget policy suggests that a. a budget deficit is needed if the economy is operating at less than full employment. b. a budget deficit should be planned during an inflationary boom. c. the budget must be balanced if the national debt is growing more rapidly than the economy. d. the budget should always be in balance

A

Which of the following is a potential drawback of an expansion of government spending projects during a recession? a. Spending projects are easily reversed once the economy has recovered. b. Government spending projects are not included in the calculation of GDP. c. Those benefiting from spending projects will lobby for a continuation of these projects long after the economy has recovered. d. Government spending projects will not encourage rent-seeking activity.

C

Which of the following is a major insight of the Keynesian model? a. Changes in output, as well as changes in prices, play a role in the macroeconomic adjustment process, particularly in the long run. b. A general overproduction of goods relative to total demand is impossible because production creates its own demand. c. The responsiveness of aggregate demand to changes in supply will be directly related to the availability of unemployed resources. d. Fluctuations in aggregate demand are an important potential source of business instability.

D

multiplier principle

The concept that an increase in spending on a project will generate income for the resource suppliers, who will then increase their consumption spending. In turn, their additional consumption will generate income for others and lead to still more consumption

marginal prosperity to consume

additional consumption divided by additional income

public choice analysis

applies principals of economics to study political processes. links the theory of individual behaviors to political action

automatic stabilizers

automatic reductions in revenues and increases in outlays when the economy shrinks relative to its potential without change in policy

balanced budget

current government spending is equal to its revenue from taxes, subsidies, etc

budget deficit

government spending exceeds it's revenue

how do high marginal tax rates affect the economy?

high marginal tax rates discourage people to work because it feels "pointless" having large sums of the money one earns taken away

the first lesson of economics is scarcity; there's never enough of everything for everyone. the first lesson of politics is to disregard the first lesson of economics

if a candidate is going to be successful, their positive attributes must be brought to the attention of rationally ignorant voters focused on their families, jobs, various civic activities, and local sports teams

what do low marginal tax rates cause?

it creates an incentive for people to work because they want to earn more. this allows for an increase in aggregate supply because more people are supplying more resources.

what makes a political process productive?

it will allocate all costs so that every voter gains rather than some gaining significantly while others lose. "When voters pay in proportion to benefits received, all voters will gain if the government action is productive, and all will lose if it is unproductive."

what's the difference between government spending and transfer payments?

transfer payments only account for a portion of government spending

special interest issue

only a small minority benefits greatly but it imposes a small cost to everyone else

user charge

payments consumers are required to make in order to receive a government service ex. garbage collection

rent seeking

people invest resources into lobbying to gain favor from the government for funding

rational ignorance effect

rational individuals have little to no incentive to vote or educate themselves prior to voting as it is not likely their individual vote will impact the election

Of total government spending, how much is allocated to transfer payments?

roughly 17.6%

crony capatilism

the situation where the allocation of resources, and winners and losers in business, are determined by political favors rather than by consumer preferences translated through the market profit-and-loss system

transfer payments

transfers of payments between individuals who pay taxes and others who receive government programs (Social Security, unemployment benefits, welfare programs)

pork barrel legislation

unrelated projects benefitting many interests into 1 bill to obtain funding for a group of projects intensely desired

problems with the multiplier principal

- can be timely/ not immediate - assumes additional spending brings "idle workers" into the labor force rather than acknowledging that these resources for additional projects are just being taken away from other projects

What is Keynesian theory?

- rejected the view that lower interest rates and wages allow the economy to readjust - believed spending motivated firms to supply goods and services - changes in output affect the economy, not the changes in spending

why do high tax rates decrease output?

1. it discourages work effort and productivity 2.foreign investors look elsewhere and money is used for less productive resources (lobbying and campaigning) 3. high marginal tax rates encourage people to substitute less desired non tax items for taxible more desired items

What are the main arguments against using fiscal stimulus during a recession?

1.First, they argue that the increased borrowing, upward pressure on interest rates, inflow of capital, and appreciation of the dollar will reduce net exports and aggregate demand 2. Government spending is often driven by political considerations, not economic 3. When the government is spending a lot on projects, it encourages people to put resources into lobbying and campaigning for resources

The crowding-out effect implies that budget deficits will a. increase real interest rates and lower the future stock of private capital. b. decrease real interest rates and increase the future stock of private capital. c. increase the productivity of workers in the future. d. lead to higher levels of income for workers in the future.

A

When the federal government is running a budget surplus, a. government revenues exceed government expenditures. b. government expenditures exceed government revenues. c. the economy must be in a recession. d. additional government borrowing will decrease the size of the national debt.

A

restrictive fiscal policy

A reduction in government expenditures and/or an increase in tax rates such that the expected size of the budget deficit declines (or the budget surplus increases). Keynes suggested it's use in times of excess aggregate demand.

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

A person's marginal tax rate determines the percentage of a. taxes that are allocated to the repayment of government debt. b. additional earnings that the individual is permitted to keep. c. the individual's total income that must be paid in taxes. d. additional taxable income allocated to saving rather than investment

B

According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate? a. a reduction in government expenditures b. an increase in government expenditures or reduction in taxes, financed by borrowing c. a balanced federal budget d. an increase in taxes

B

If output is less than full employment in the Keynesian model, what is needed to restore full employment? a. an increase in the price level b. an increase in aggregate demand c. a reduction in government expenditures d. an increase in aggregate supply

B

In the Keynesian model, the primary determinant of consumer spending is a. the interest rate. b. disposable income. c. expectations of inflation. d. the stage of the business cycle.

B

Keynesian critics would argue that expansion in government debt during a recession would lead to a. consumer optimism and a substantial increase in private consumption and investment. b. higher future interest payments and tax rates. c. lower future interest payments and tax rates. d. a strong recovery and substantial future economic growth.

B

Which of the following is most likely to lead to an increase in current consumption? a. an increase in personal income tax rates b. an increase in one's expected future income c. a decrease in one's marginal propensity to consume d. an increase in the interest rate

B

According to Keynesian theory, which of the following would most likely stimulate an expansion in real output if the economy were in a recession? a. an increase in tax rates b. a balanced budget c. a budget deficit d. a budget surplus

C

According to the Keynesian view, expansionary fiscal policy will have its greatest impact a. when planned aggregate expenditures equal total output. b. during a strong economic expansion. c. when widespread unemployment is present. d. during a period of severe inflation.

C

If a fiscal policy change is going to exert a stabilizing impact on the economy, it must a. be expansionary. b. be restrictive. c. be timed correctly. d. keep the federal budget in balance.

C

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? a. increased personal income taxes b. additional money printed by the Federal Reserve c. additional bonds issued by the U.S. Treasury d. the financial assets of the members of Congress who are legally responsible for the deficit

C

The Keynesian macroeconomic model was highly popular for several decades following World War II because it provided an explanation for a. the strong economic recovery following the end of the war. b. the high inflation rates of the 1950s. c. the prolonged unemployment of the 1930s. d. the high rate of investment during the Great Depression.

C

The crowding-out effect suggests that a. expansionary fiscal policy causes inflation. b. high marginal tax rates crowd out tax deductions. c. the demand stimulus effects of a budget deficit will be weak because the borrowing to finance the deficit will lead to higher interest rates. d. a budget surplus will cause the economy to slip into a major recession.

C

The expenditure multiplier is used to calculate the change in a. spending caused by a change in income. b. equilibrium income resulting from a change in interest rates. c. equilibrium income resulting from an independent change in spending. d. investment caused by a change in consumption.

C

When the economy enters a recession, automatic stabilizers create a. higher taxes. b. more discretionary spending. c. larger budget deficits. d. larger budget surpluses.

C

Which of the following is the best explanation of how expansionary fiscal policy can crowd out net exports? a. Expansionary fiscal policy leads to high budget deficits. Foreigners become concerned about the stability of the United States and stop buying American goods as a result. b. When the government spends more, some of its spending is on foreign goods. As imports rise, net exports fall. c. The higher interest rates associated with expansionary fiscal policy attract foreign investors. To buy U.S. financial assets, foreigners bid up the real exchange rate, which in turn causes net exports to fall. d. The cut in taxes associated with expansionary fiscal policy stimulates aggregate supply. As aggregate supply rises, consumers have a greater incentive to purchase domestic goods, causing imports to fall and net exports to drop.

C

Which of the following statements is true? a. The empirical evidence indicates that countries with higher marginal tax rates have higher economic growth rates. b. Unlike other policies, supply-side tax cuts have their full impact on an economy instantaneously. c. The supply-side effects of changes in marginal tax rates take place over lengthy time periods. d. In the 1960s and 1980s, when the marginal tax rates were reduced, the share of income taxes paid by high-income taxpayers fell.

C

Which of the following will make it difficult to institute fiscal policy in a stabilizing manner? a. Politicians will find it more attractive to raise taxes than to increase spending. b. Politicians will find it attractive to increase taxes during a recession, but they will be reluctant to reduce them during an expansion. c. Politicians will find budget deficits attractive during a recession, but they will be reluctant to run budget surpluses during an expansion. d. Politicians will find budget surpluses attractive during a recession, but they will be reluctant to run budget deficits during an expansion.

C

Expansionary fiscal policy financed by government borrowing can lead to a. higher interest rates and lower private investment under the crowding-out view. b. an increase in aggregate demand under the Keynesian view. c. no change in aggregate demand under the new classical view. d. all of the above.

D

Increases in government expenditures and large budget deficits are projected for 2010-2019. The crowding-out and new classical views indicate this fiscal policy will lead to a. lower interest rates and tax rates that will enhance economic growth. b. higher interest rates and tax rates that will slow economic growth. c. increases in aggregate demand that will lead to strong economic growth. d. high rates of future inflation.

D

John Maynard Keynes and his followers argued that the Great Depression was primarily the result of a. excessive government spending. b. large budget deficits. c. the perverse monetary policies of the Fed. d. insufficient aggregate spending on goods and services.

D

Other things constant, a reduction in marginal tax rates will tend to increase aggregate supply because the lower taxes will increase a. disposable income, which will induce an increase in consumption and aggregate supply. b. business optimism, which will increase both investment and aggregate supply. c. savings, which will lead to lower interest rates, an increase in consumption, and an increase in aggregate supply. d. the attractiveness of productive activity relative to leisure and tax avoidance.

D

Other things constant, an increase in marginal tax rates will a. decrease the supply of labor and reduce its productive efficiency. b. decrease the supply of capital and decrease its productive efficiency. c. encourage individuals to buy goods that are tax deductible instead of those that are more desired but nondeductible. d. do all of the above

D

Why might increases in government spending be ineffective during a recession? a. The level of aggregate demand will not affect output and employment during a recession. b. Increases in government spending cannot stimulate aggregate demand. c. According to the Keynesian view, fiscal policy will be largely ineffective during a recession. d. Recessions often reflect a coordination problem related to the composition of aggregate demand, not just its level.

D

supply side economists

believe that changes in marginal tax rates have a big impact on aggregate supply

problems with fiscal policy

can encourage foreign countries to buy US products which increases the price which ultimately decreases US net exports

short-sightedness effect

elected political officials will have a strong incentive to spend on programs designed to provide highly visible benefits before the next election, but they will be reluctant to levy the taxes for their finance

logrolling

exchange between politicians for support on political issues

budget surplus

government revenue exceeds it's spending

crowding-out effect

reduction in private spending due to higher interest rates caused by budget deficits that increase demand for loanable funds, putting pressure on interest rates