Fiscal Policy
Fiscal policy is concerned with _____
government spending and taxation.
Which of the following is an example of an automatic stabilizer?
an increase in unemployment compensation during recession
Which of the following is not a tool of fiscal policy?
money supply
A $0.2 trillion increase in government purchases increases the quantity demanded by $1.0 trillion, the price level remaining constant. This additional spending reflects the _____ effect.
simple spending multiplier
All of the following are variables that can be manipulated to affect fiscal policy, except one. Which is the exception?
the federal funds rate
Political business cycles result _____
from the economic fluctuations that occur when discretionary policy is manipulated for political gain.
Which of the following will not increase when net taxes decrease?
government expenditure
During an election year, the federal government would most likely increase _____
government purchases of goods and services.
Which of the following are components of fiscal policy?
government purchases, transfer payments, and taxes
Which of the following sets of policies would unambiguously move the economy to full employment?
increase in government purchases, decrease in taxes, and increase in transfer payments
A decrease in net taxes _____
increases GDP less than an equal increase in government purchases
An increase in the federal budget deficit _____
increases aggregate demand.
When government purchases increase, the spending multiplier indicates the _____
size of the rightward shift of the aggregate demand curve at a given price level.
In the 1970s, one of the causes of stagflation was _____
adverse supply shocks that shifted the aggregate supply curve left
The introduction of a tax by the government will _____
affect consumption through a change in disposable income.
If fiscal policy is used to close an expansionary gap, the _____
aggregate demand curve shifts leftward and the price level falls.
Fiscal policy focuses on manipulating _____
aggregate demand to smooth out business fluctuations
Which of the following fiscal programs is least likely to increase aggregate demand?
an increase in taxes
Which of the following is most likely to close a recessionary gap in the economy?
an increase in the compensation for government employees
A federal budget deficit occurs when _____
federal government purchases exceed net taxes.
To close a recessionary gap using fiscal policy, the government can _____
increase government spending by less than the size of the gap.
Suppose the government reduces its budget deficit at the same time that energy prices rise sharply. Which of the following is most likely to happen?
Real GDP will fall since both events will tend to cause an economic contraction.
Which of the following assumptions is true of government spending and taxes?
They do not depend on the level of GDP
What impact do tax rebates have?
They have little impact on consumption.
Which of the following statements best explains the effects of transfer payments and taxes on aggregate spending?
Transfer payments and taxes affect aggregate spending indirectly by first changing disposable income and thereby changing consumption.
Which of the following would increase aggregate demand?
a deficit in the government budget
Automatic stabilizers _____
are revenue and spending programs in the federal budget that automatically adjust with the ups and downs of the economy.
If people base their spending decisions more on permanent income than current income, then _____
attempts to fine-tune the economy with temporary tax rate adjustments will be less effective.
The distinction between discretionary fiscal policy and the use of automatic stabilizers is that _____
automatic stabilizers, once adopted, are built into the structure of the economy.
Revenue and spending programs in the federal budget that automatically adjust with the ups and downs of the economy are known as _____
automatic stabilizers.
During economic contractions, transfer payments such as welfare benefits _____
automatically increase, reducing the impact of the contraction on disposable income.
If people base their spending decisions more on current income than on permanent income, then _____
consumption spending will be more responsive to a temporary change in income than a change in permanent income.
Fiscal policy used to close an expansionary gap is known as _____
contractionary fiscal policy
A new tax introduced by the government will _____
decrease disposable income.
Deliberate manipulation of government spending and taxes to promote macroeconomic goals is effected by _____
discretionary fiscal policy.
Deliberate manipulation of government spending and taxes to promote macroeconomic goals is known as _____
discretionary fiscal policy.
During a recession, unemployment insurance ensures that _____
disposable income does not fall as much as the decrease in GDP.
One lesson of the Great Depression was that potential GDP could _____
exceed equilibrium GDP
Fiscal policy used to close a recessionary gap is known as _____
expansionary fiscal policy.
In the 1970s, one of the causes of stagflation was _____
higher oil prices that shifted the aggregate supply curve left.
Discretionary fiscal policy _____
is the deliberate manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals.
Permanent income _____
is the income a person expects on average over the long term.
Contractionary fiscal policy _____
is used to close an expansionary gap.
The effect of automatic stabilizers on the business cycle is to _____
make both upswings and downswings smaller.
Large federal budget deficits _____
make it difficult to use discretionary fiscal policy
If the Naval Research Laboratory fired a chemist and the Environmental Protection Agency hired her at the same salary, the net effect of these events would cause _____
no change in aggregate demand.
A change in net taxes affects the equilibrium quantity of GDP demanded _____
only indirectly, changing the level of disposable income.
If government purchases increase and net taxes decrease, _____
output and employment will increase.
Which of the following is a component of aggregate demand?
purchases by the government
Which of the following best describes stagflation?
rising unemployment and high inflation rates
When net taxes increase and government purchases decrease, _____
the aggregate demand curve shifts leftward.
When spending by the federal government exceeds net taxes, _____
the aggregate demand curve shifts rightward.
Which of the following is an automatic stabilizer?
unemployment insurance
Fiscal policy _____
uses the federal government's powers of spending and taxation to affect employment, the price level, and GDP.
Lags in the approval and implementation of fiscal policy _____
weaken fiscal policy as a tool of economic stabilization.
_____ when net taxes are reduced.
Consumption rises
Suppose an initial increase in government expenditure increases output by $50,000. If the size of the multiplier was 1.0, the size of the initial increase in government expenditure was _____
$12,500
Suppose an initial increase in government expenditure increases output by $50,000. If the size of the multiplier is 2.5, the size of the initial increase in government expenditure was _____
$20,000
Suppose government purchases increase by $100 million in an economy, which leads to total output increasing by $500 million. The size of the multiplier is _____
5
Which of the following best illustrates the use of discretionary fiscal policy?
Congress passing a bill authorizing $2 billion in additional spending when it receives news of a deepening recession
Which of the following correctly describes the effects of a decrease in net taxes?
Disposable income increases, consumption increases, and saving increases.
Which of the following is not a weakness of fiscal policy?
Fiscal policy works only during periods of stagflation.
Which of the following is true of government purchases?
Government purchases are independent of the level of real GDP.
Which of the following is not a weakness of fiscal policy as a tool of economic stabilization?
Households may not respond to changes they perceive as permanent.
When the government closes an expansionary gap with a change in government spending, the _____ in government spending leads to _____.
decrease; a decrease in both real GDP and the price level
Which of the following is an appropriate fiscal policy prescription that addresses the inflation that occurs when the economy is above potential GDP?
increasing taxes to reduce aggregate demand
Expansionary fiscal policy _____
is a fiscal policy used to close a recessionary gap.
Discretionary fiscal policy is a policy that _____
is an intentional change in taxation or government spending
Suppose the government expenditure increases by $200 and the simple spending multiplier equals 5. The final increase in output will be _____
more than $200.
A decrease in net taxes _____
raises aggregate expenditure by raising disposable income, thereby increasing consumption.
The steeper the short-run aggregate supply curve, _____
the larger the impact of a shift in aggregate demand on the equilibrium price level.
If fiscal policy makers increase aggregate demand in an attempt to decrease the unemployment rate below the natural rate of unemployment, then _____
the only lasting impact of the policy is a higher price level
A change in government purchases has the greatest effect on the economy in the short run when _____
the short-run aggregate supply curve is relatively flat.
The effect of a change in net taxes on the quantity of real GDP demanded equals the resulting shift in the consumption function times _____
the simple spending multiplier
The steeper the short-run aggregate supply curve, _____
the smaller the impact of a shift in aggregate demand on equilibrium output.
The exact change in equilibrium output due to a shift in the short-run aggregate demand curve depends on _____
the steepness of the aggregate supply curve.
People will be likely to spend a higher percentage of any additional income when _____
they believe that the increase is permanent
People will be likely to spend a smaller percentage of any additional income when _____
they believe that the increase is temporary.
In which of the following ways does government affect the consumption component of planned aggregate expenditures?
through net taxes, which change disposable income