Econ222 Midterm II

The national debt _____ when the federal government incurs a _____.

rises; deficit

An expansionary fiscal policy:

may include decreases in taxes.

The cyclically adjusted budget balance is an estimate of:

what the budget balance would be if real GDP were exactly equal to potential output

Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD:

no change in discretionary fiscal policy is warranted.

Discretionary fiscal policy may fail to stabilize the economy or may even make the economy less stable because of:

lags in deciding on and implementing a policy change.

Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.

less than

The cyclically adjusted budget deficit fluctuates _____ the actual budget deficit.

less than

If the marginal propensity to consume is 0.9, then the tax multiplier will be:

less than 10.

The multiplier effect of changes in government transfers is:

less than the multiplier effect of a change in government spending.

Expansionary fiscal policies:

make the budget surplus smaller.

Fiscal policy that increases aggregate demand is:

Expansionary

Which of the following is NOT a government transfer payment?

the federal payroll

The larger the amount of outstanding public debt:

the larger the fraction of the federal budget deficit that must be devoted to interest payments.

If government spending increases and taxes decrease:

the public debt will increase.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $700 billion:

there is a recessionary gap.

Look at the figure Inflationary and Recessionary Gaps. At E2, the economy:

is in equilibrium.

If the marginal propensity to consume is 0.8 and government transfers decrease by $50 million, then equilibrium GDP will decrease by:

$200 million.

Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, its purchases of goods and services and its transfers are $2 trillion, and tax revenues are $1.5 trillion. At the end of the fiscal year, the debt is:

$7.5 trillion.

Look at the figure Short-Run Equilibrium. The economy is in short-run equilibrium. To move the economy to potential GDP, the government should reduce its spending by an amount equal to:

(Y1 - YP)(1 - MPC).

Automatic stabilizers are government spending and taxation changes that cause fiscal policy to be _____ when the economy contracts.

expansionary

The multiplier effect of changes in government purchases of goods and services is equal to:

1 / (1 - MPC).

Spending for Medicare and Medicaid accounts for approximately _____ of federal spending.

20%

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:

5

Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is a decrease in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD1; left; decrease; decrease

Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E2. If there is a decrease in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD2; left; decrease; decrease

Medicaid, food stamps, and sales taxes are all automatic stabilizers.

True

Decreasing funding for space exploration will shift the _____ curve to the _____.

aggregate demand; left

Government tax revenue rises and falls with the business cycle as:

an automatic stabilizer.

Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD':

an expansionary fiscal policy may be warranted.

The 2009 American Recovery and Reinvestment Act was an example of:

an expansionary fiscal policy.

Which of the following fiscal policies would make a budget surplus smaller or a budget deficit larger?

an increase in government purchases of goods and services

Government transfer payments rise when the economy is contracting and fall when the economy is expanding. In this role, transfer payments are described as:

automatic stabilizers.

What can the federal government do to finance a deficit?

borrow funds

When the government has a deficit, it will most likely finance the deficit by:

borrowing the money.

Changes in taxes and government transfers shift the aggregate demand curve _____ government purchases.

by less than

Changes in the budget balance:

can be both the result of and the cause of changes in the economy.

Time lags make:

correct use of both fiscal and monetary policy challenging.

If the marginal propensity to consume is 0.75 and government purchases of goods and services decrease by $30 billion, real GDP will:

decrease by $120 billion.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $850 billion, to bring the economy to potential output the government should:

decrease spending by $10 billion.

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $700 billion, which of the following policies would bring the economy to potential output?

Decrease taxes by $25 billion.

An increase in government transfer payments of $100 billion and a tax cut of $100 billion will have equal effects on the budget balance and unequal effects on real GDP.

False

If a government has large consecutive budget deficit but its GDP is growing faster than its debt, the ratio of debt to GDP will increase.

False

If at the beginning of the year the public debt is $12 trillion, government spending and transfers are $2 trillion, and tax revenues are $3 trillion, at the end of the year the public debt is $13 trillion.

False

If debt increases faster than GDP, the ratio of debt to GDP will fall.

False

In 1999 many European countries signed a stability pact in which they agreed to accept the dollar as their common currency.

False

The budget balance is calculated as:

T - G - TR.

The government's budget balance is:

T - G - TR.

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following is the most likely result?

The economy will move into a recession.

An increase in government spending for goods and services is an autonomous increase in aggregate demand.

True

Expansionary fiscal policy pushes the aggregate demand curve to the right.

True

An automatic stabilizer that works when the economy contracts is:

a rise in government transfers as more people receive unemployment insurance benefits.

An inflationary gap occurs when:

actual output exceeds potential output.

Look at the figure Fiscal Policy Options. If the aggregate demand curve is ADʺ, the most appropriate discretionary fiscal policy is to _____ government transfer payments and _____ income tax rates.

decrease; increase

When the economy is in a recession, tax receipts _____ and unemployment insurance payments _____.

decrease; increase

A reduction in government transfers _____, therefore shifting the aggregate demand curve to the _____.

decreases disposable income and consumption; left

Expansionary fiscal policy includes:

decreasing taxes.

An increase in government transfer payments of $250 billion and a tax cut of $250 billion will have _____ effects on the budget balance and _____ effects on real GDP.

equal; equal

In Japan during the 1990s _____ policies were put into effect to _____.

expansionary spending; prop up aggregate demand

The cyclically adjusted budget deficit:

fluctuates less than the actual budget deficit.

Social insurance programs are:

government programs intended to protect families against economic hardships.

The national debt:

grows when the government runs a deficit.

If the average retirement age decreases:

implicit liabilities will increase.

If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.

increase government purchases; AD; right

Look at the figure Fiscal Policy Choices. It would be appropriate to use contractionary fiscal policy to shift aggregate demand in _____ from _____.

panel (b); AD1 to AD2

When the government borrows funds to pay for budget deficits:

private investment spending may be crowded out.

If the economy is operating well below potential output, the cyclically adjusted budget balance deficit is _____ than the actual budget balance.

smaller than

Medicaid, Medicare, and Social Security are examples of:

transfer payments.

Most economists believe that a balanced budget requirement would:

undermine the role of taxes and transfers as automatic stabilizers.

Which of the following is an automatic stabilizer?

unemployment compensation payments

If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should increase government purchases of goods and services by $75 billion.

False

The cyclically balanced budget is an estimate of what the budget balance would be during a recessionary gap with real GDP less than potential output.

False

A government can pay off its debt if:

GDP grows faster than the debt.

Which of the following is NOT an argument AGAINST the use of expansionary fiscal policy?

Government borrowing may reduce the marginal propensity to consume.

Suppose the government increases spending more than is necessary to close a recessionary gap. What is the most likely result?

Inflation will increase.

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands.

True

Fiscal policy measures of the same dollar amounts will have equal effects on the budget balance but may change real GDP by different amounts.

True

If a country has a very high level of public debt, lenders may insist on austerity measures of raising taxes and decreasing government spending, which worsens economic conditions.

True

If a government has large consecutive budget deficits and if the public debt is growing faster than GDP, its ratio of debt to GDP will increase.

True

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should decrease government purchases of goods and services by $40 billion.

True

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should increase taxes by more than $40 billion.

True

In 2009 Greece received emergency loans from other European countries and the International Monetary Fund. These loans required the Greek government to cut spending, which worsened the Greek recession.

True

Lower government transfers or higher taxes make a budget surplus smaller or a budget deficit larger.

True

Most economists believe that the government should balance the budget on average, allowing deficit years when the economy is in recession to be offset by surpluses during years of expansion.

True

Most economists oppose an annually balanced budget because it would undermine automatic stabilizers.

True

One of the lags associated with fiscal policy is the time it takes to recognize that the economy has developed a recessionary or inflationary gap.

True

The 2009 U.S. stimulus was an expansionary fiscal policy that increased aggregate demand.

True

The multiplier effect of an increase in transfer payments is smaller than that of an equal increase in government purchases of goods and services because some of the transfer payment is likely to be saved.

True

Discretionary fiscal policy refers to changes in:

government spending or taxes to close a recessionary or inflationary gap.

Transfer payments are payments that:

governments make to households although the government did not receive a good or service from the household.

The multiplier effect of government purchases of goods and services:

has a more direct and bigger impact than an equal amount of tax changes.

The cyclically balanced budget is important because it:

helps to determine whether the government's taxing and spending policies are sustainable in the long run.

Suppose the economy is in a recessionary gap. A $100 billion _____ is likely to increase real GDP by the largest amount.

increase in government purchases

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _____ transfer payments by _____ $40 billion.

increase; more than

A government budget surplus would be contractionary because of all of the following EXCEPT _____ are contractionary.

increases in government purchases

If overall spending declines and thus the economy contracts, the government could counter this by:

increasing government spending.

When policy makers make a deliberate fiscal policy decision:

it is called discretionary fiscal policy.

The U.S. national debt as a percentage of GDP is _____ that of Greece.

lower than

A law requiring the federal budget to be balanced each year would likely:

make business cycles more severe.

When the unemployment rate decreases, the budget:

surplus gets larger or the deficit gets smaller.

An example of an automatic stabilizer is:

tax receipts rising when GDP rises.