Econ Quiz 16

If the government does not take any policy​ actions, then, in​ 2017, the value of real GDP will be ​$..... trillion and the value of the price level will be

18 117

If the government takes no policy​ actions, the inflation rate in 2017 will be

2.6%

If the government uses fiscal policy to keep real GDP at its potential​ level, the inflation rate in 2017 will be

4.4%

​"A contractionary fiscal policy involves a decrease in government purchases or a decrease in​ taxes."

A contractionary fiscal policy involves the decrease of government purchases​ and/or an increase in taxes in order to decrease aggregate demand.

Suppose the economy is initially in​ long-run equilibrium at point A. The government decides to increase taxes In the​ short-run, this contractionary fiscal policy will​ cause:

A shift from AD2 to AD1 and a movement to point​ D, with a lower price level and lower output.

A political commentator​ argues: ​"Congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are​ unpopular."

Agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy.

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model... That​ is, what step can we expect the federal government to take to control inflation in the second​ period?

All of the above

Select the answer below that best corrects the following​ statement: ​"An expansionary fiscal policy involves an increase in government purchases or an increase in​ taxes."

An expansionary fiscal policy involves the increase of government purchases​ and/or a decrease in taxes in order to increase aggregate demand.

Are federal expenditures higher today than they were in​ 1960?

As a percentage of​ GDP, federal expenditures have *increased* since 1960.

Are federal purchases higher today than they were in​ 1960?

As a percentage of​ GDP, federal purchases have *decreased* since 1960.

Alicia and Jaime are most likely to have a difference of opinion on which of the​ following?

Consumers in Terbia are confident that the economy will turn around in the near future.

Consider the figures below. Determine which combination of fiscal policies shifted AD1 to AD2 in each figure and returned the economy to​ long-run macroeconomic equilibrium.

Example​ (A): Expansionary fiscal policy. Example​ (B): Contractionary fiscal policy.

The figure to the right illustrates the dynamic AD-AS model We would expect the federal government to pursue what type of policy in order to move AD 2 AD2, policy and reach equilibrium​ (point C) in the second​ period?

Expansionary Fiscal Policy

What is the difference between federal purchases and federal​ expenditures?

Federal purchases require that the government receives a good or service in​ return, whereas federal expenditures include transfer payments.

What is the difference between federal government purchases​ (spending) and federal government​ expenditures?

Government purchases are included in government expenditures

What changes should they make if they decide a contractionary fiscal policy is​ necessary?

In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes?

In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes.

Which of the​ following, if​ true, would suggest that lowering income tax rates may not be very effective in reviving growth in the near​ term?

Market research suggests that the slowdown in the economy has considerably increased​ people's propensity to save.

According to the multiplier effect an initial decrease in government purchases decreases real GDP by .... the initial decrease in government purchases.

More than

Which of the following is not a correct comparison between a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply​ model?

None of the above are correct statements about the two models

Two years​ back, the Republic of​ Terbia, a developed​ economy, experienced a massive boom in the information technology​ (IT) industry. ...... Which of the​ following, if​ true, will support​ Jaime's view that an expansionary fiscal policy would be ideal in the given​ situation?

The current nominal interest rate is close to zero in the country.

The growth rate of​ Zerbia, a small developing​ country, has fallen close to zero percent in the current year. Harry Miller and Jonathan​ Taylor, who are columnists with a business​ daily, are discussing suitable fiscal measures to revive economic growth in the country..... Which of the​ following, if​ true, would weaken​ Harry's claim that government investment in green technology will revive the economy in the near​ term?

The green technology industry in this country is highly​ capital-intensive and dependent on imported machinery.

If the​ short-run aggregate supply curve​ (SRAS) were a horizontal​ line, what would be the impact on the size of the government purchases and tax multipliers ... ​

The impact of the multiplier would be larger if the SRAS curve is horizontal.

When is it considered​ "good policy" for the government to run a budget​ deficit?

When borrowing is used for​ long-lived capital goods.

If the government cuts taxes in order to increase aggregate​ demand, the action is called

a discretionary fiscal policy

Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called

automatic stabilizers

Changes in taxes and spending that happen without actions by the government are called

automatic stabilizers.

Because government spending and tax revenues

change with​ GDP, balancing the budget annually would result in economic disruptions.

An attempt to reduce inflation requires​ _____________ fiscal​ policy, which causes real GDP to​ _________ and the price level to​ __________.

contractionary; fall; fall

Complete the following table for a static​ AD-AS model

decrease taxes : rise Decrease Gov Spending : Fall

In order to bring real GDP to its potential level in​ 2017, the government can engage in .......fiscal policy by either.....government spending or...... taxes

expansionary increasing decreasing

The higher the tax​ rate, the larger the multiplier effect.

false

If the federal​ government's policy is​ successful, what is the effect on the following macroeconomic​ indicators?

increases DNC Increases Decreases

If government purchases were to decrease by​ $300 billion or if taxes were increased by​ $300 billion, the equilibrium level of real GDP would decrease by

more than 300 billion incorrect

The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of The Federal Reserve sells Treasury securities. This is an example of The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of The revenue the federal government collects from the individual income tax declines during a recession. This is an example of The federal government changes the required gasoline mileage for new cars. This is an example of Congress and the president enact a temporary cut in payroll taxes. This is an example of

not a fiscal policy. not a fiscal policy. an automatic stabilizer. an automatic stabilizer. not a fiscal policy. a discretionary fiscal policy.

Economists use the term fiscal policy to refer to changes in taxing and spending policies

only by the federal government.

A​ "strengthening economy" could lead to a downward revision of the projected budget deficit because as GDP​ increases,

tax revenues increase and government spending​ decreases, lowering the deficit.

The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.

true

Since World War​ II, the federal​ government's share of total government expenditures has been between

two-thirds and​ three-quarters.

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not​ increase?

​Yes, because fiscal policy and monetary policy are separate things.