Macro Econ - Chapt. 16 (unfinished)

27 Which of these would be a fiscal policy the government might want to use if the economy is operating at too high a level of output? Increasing government purchases of goods and services Increasing income tax rates Increasing the money supply and lowering interest rates

ANSWER (not Increasing the money supply and lowering interest rates) Increasing income tax rates The government might want to increase income tax rates if the economy is operating at too high a level of output. Policy advocates argue that the government needs contractionary policies during times when the economy is operating at too high a level of output. These would include decreasing government spending and/or increasing taxes. Increasing the money supply and lowering interest rates is expansionary monetary policy, not contractionary fiscal policy. Additional Learning Higher taxes take money away from disposable income and reduce consumption by more than that amount depending on the size of the multiplier.

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16 Fiscal policy is​ ______. A. successful only if the government has a budget surplus B. the set of tools used by the Federal Reserve to achieve macroeconomic objectives C. the use of the federal budget to achieve macroeconomic objectives D. successful only if the government has a balanced budget The​ ______ proposes a budget to​ ______ each​ ______. A. ​President; Congress; September B. ​Congress; the​ President; February C. ​President; Congress; February D. ​Congress; the​ President; September

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30 Aggregate demand​ ______ by​ ______ $100 billion. A. ​increases; less than B. ​increases; more than C. ​decreases; more than D. ​increases; exactly E. ​decreases; less than

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24 When the tax rate increases, the size of the multiplier effect: increases. decreases. remains the same.

ANSWER (not increases) decreases When the tax rate increases, the size of the multiplier effect decreases. The higher the tax rate, the smaller the amount of any increase in income that households have available to spend, which in turn reduces the size of the multiplier effect.

05 The decline in private expenditures that results from an increase in government purchases is known as: reduction. stabilization. crowding out.

ANSWER crowding out. The decline in private expenditures that results from an increase in government purchases is known as crowding out. If government borrowing increases interest rates, it will reduce business investment and consumer spending. This spending reduction is due to crowding out. Stabilization attempts to smooth fluctuations in the economy.

29 Which of these fiscal policy actions will increase real GDP in the short run? An increase in government expenditures An increase in the Social Security tax An increase in the individual income tax

ANSWER An increase in government expenditures

12 The American Recovery and Reinvestment Act of 2009 is a clear example of __________. discretionary fiscal policy contractionary fiscal policy an automatic stabilizer

ANSWER discretionary fiscal policy The American Recovery and Reinvestment Act of 2009 is a clear example of discretionary fiscal policy. This legislation involved increases in government spending and tax cuts both designed to increase aggregate demand. This legislation was designed to grow the economy and create jobs in order to move out of recession. A contractionary fiscal policy would be designed to reduce aggregate demand and would involve increasing taxes and reducing government spending. An automatic stabilizer does not require explicit action from policymakers. Additional Learning This type of policy is sometimes called expansionary fiscal policy.

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22 Which of these are the largest sources of federal government revenues? Corporate income taxes and sales tax Individual income taxes and social security withholdings Property taxes and excise taxes

ANSWER (not Property taxes and excise taxes) Individual income taxes and social security withholdings Individual income taxes and social security withholdings are the largest sources of federal government revenues. The federal government derives more than 80 percent of its revenue from these two sources. Corporate income tax comprises about 11 percent of federal government revenue with the remainder coming from all other sources.

32 An automatic stabilizer is at work if as real GDP​ increases, ______. A. tax revenues decrease and interest rates increase B. transfer payments increase and tax revenues decrease C. tax revenues increase and transfer payments decrease D. transfer payments decrease and interest rates decrease

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19 Budget deficits automatically __________ during recessions and __________ during expansions. decrease, increase increase, increase increase, decrease

ANSWER (not increase, increase) increase, decrease Budget deficits automatically increase during recessions and decrease during expansions. Wages and profits fall during recessions and lower tax revenues which contributes to a higher deficit. In addition, government transfer payments automatically increase when the economy enters recession. During expansions tax receipts go up and transfer payments go down which both serve to decrease deficits.

21 According to supply-side theory, fiscal policymakers can combat the impact of recessions by: lowering tax rates. raising tax rates. increasing government spending.

ANSWER (not increasing government spending.) lowering tax rates. According to supply-side theory, fiscal policymakers can combat the impact of recessions by lowering tax rates. Supply-siders believe that lowering taxes will encourage investment spending and increase overall output via an increase in supply. Prices will also fall as a result of that shift. Raising taxes would push the economy deeper into recession. And, increases in government spending is a Keynesian philosophy.

06 The tax multiplier equals the change in: equilibrium GDP multiplied by the change in taxes. taxes divided by the change in equilibrium GDP. equilibrium GDP divided by the change in taxes.

ANSWER (not equilibrium GDP multiplied by the change in taxes.) equilibrium GDP divided by the change in taxes. The tax multiplier equals the change in equilibrium GDP divided by the change in taxes. The tax multiplier tells us how much GDP will change for a given tax change. It will always be negative because tax changes and the GDP move in opposite directions. Let's say the tax multiplier was -2.1 and you cut taxes by $100 billion. In this case, the real GDP would increase by $210 billion. If you increase taxes, the real GDP would shrink by that amount.

25 According to supply-side theory, fiscal policymakers can combat the impact of recessions by: lowering tax rates. increasing government spending. raising tax rates.

ANSWER (not increasing government spending.) lowering tax rates. According to supply-side theory, fiscal policymakers can combat the impact of recessions by lowering tax rates. Supply-siders believe that lowering taxes will encourage investment spending and increase overall output via an increase in supply. Prices will also fall as a result of that shift. Raising taxes would push the economy deeper into recession. And, increases in government spending is a Keynesian philosophy.

13 Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called __________.

ANSWER automatic stabalizers Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called automatic stabilizers. The progressive tax system automatically collects higher taxes as income increases which serves to rein in spending during economic expansions. Conversely, when the economy is contracting automatic increases in government spending occur as more welfare and unemployment benefits are distributed. These automatic stabilizers serve to smooth the fluctuations in the business cycle. Expansionary fiscal policy can be used to stabilize the economy but it does not occur automatically. The same holds for discretionary spending.

02 Government policies that increase aggregate demand are called __________.

ANSWER expansionary policies Government policies that increase aggregate demand are called expansionary policies. Fiscal policies designed to stimulate or spur economic growth are expansionary. They include increased spending and lower tax rates as the primary fiscal policy tools. Policy advocates argue that the government needs contractionary policies during times when the economy is operating at too high a level of output. These would include decreasing government spending and/or increasing taxes. Recessionary policies are not a phrase used in this context although expansionary fiscal policies are used during recessions or periods of low growth.

11 The largest and fastest growing category of federal expenditures is __________. interest on the national debt transfer payments defense spending

ANSWER (not interest on the national debt) transfer payments The largest and fastest growing category of federal expenditures is transfer payments. Some of these programs, such as Social Security and unemployment insurance, were started in the 1930s. Others such as Medicare began in the 1960s or later. In any case, transfer payments comprise about 45 percent of federal government expenditures. Defense spending is about 24 percent and paying interest on the national debt currently takes about 10%.

03 The cyclically adjusted budget deficit: moves up and down as the economy moves around the potential real GDP. is never negative. is measured as if the economy were at potential real GDP.

ANSWER (not moves up and down as the economy moves around the potential real GDP.) is measured as if the economy were at potential real GDP. The cyclically adjusted budget deficit is measured as if the economy were at potential real GDP. The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy were at potential GDP. Economists believe this provides a more accurate measure of the effects on the economy of the government taxation and spending policies. By definition a deficit is negative and the cyclically adjusted budget deficit is measured at potential real GDP, not around it.

01 Changes in tax rates impact the economy through: aggregate demand. both aggregate demand and aggregate supply. aggregate supply.

ANSWER both aggregate demand and aggregate supply. Changes in tax rates impact the economy through both aggregate demand and aggregate supply. A lower tax rate stimulates aggregate supply according to supply-side theory because it provides greater incentive for entrepreneurs to increase production. However, it can also increase aggregate demand because it increases disposable income that can be used for consumption.

26 We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier. smaller the same larger

ANSWER (not same) smaller We would expect the tax multiplier to be smaller in absolute value than the government purchases multiplier. The entire amount of an increase in government purchases results in an increase in aggregate demand. But some portion of a decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods. The fractions of the tax cut that are saved and/or spent on imports will not increase aggregate demand.

08 Higher government spending would cause

Higher government spending would cause the move of the AD curve represented in this graph. Higher government spending would increase aggregate demand which is represented by a rightward shift in the AD curve. Higher taxes and lower money supply would cause the AD curve to shift to the left. In addition, decreasing the money supply is monetary policy and not fiscal policy.

20 Which of these is an example of an automatic stabilizer? An increase in government spending to fight a recession An unemployment benefit program An increase in tax rates to reduce inflation

ANSWER An unemployment benefit program An unemployment benefit program is an example of an automatic stabilizer. Automatic stabilizers are government spending and taxes that automatically increase or decrease depending on the phase of the business cycle. Unemployment benefits automatically increase during recessions and help to keep the recession's impact from being as severe as it would be without the program in place. Increasing tax rates and government spending do not happen automatically but instead require legislative action.

23 Which of these statements about the federal debt is correct? At some point, the government may have to raise taxes or cut spending to pay interest on the debt. The federal government is in danger of defaulting on its debt. Interest payments are currently about 60 percent of total federal expenditures.

ANSWER At some point, the government may have to raise taxes or cut spending to pay interest on the debt. The correct statement about the federal debt is: "At some point, the government may have to raise taxes or cut spending to pay interest on the debt." These solutions become more likely as the debt increases. However, at the current time interest on the federal debt is only about 10 percent of total federal expenditures. The federal government is not in any danger of defaulting on its debt. Additional Learning While interest rates are relatively low, so are interest payments. However, if interest rates increased dramatically, it would cost more to make the interest payments. This, in turn, would make tax hikes and spending cuts more likely since the government will need to generate additional funds from some source.

07 If the federal government's expenditures are less than its revenue, there is a __________. budget surplus bond sale budget deficit

ANSWER budget surplus If the federal government's expenditures are less than its revenue, there is a budget surplus. Government budget surpluses occur very infrequently. Instead, the government regularly spends more money that it receives in revenue which is a budget deficit. When this occurs the shortfall is financed through the sale of government bonds. Additional Learning The annual budget deficits for the U.S. government exceeded $1 trillion per year for the period 2009-2012.

33 Choose the correct statement. A. The balanced budget multiplier is positive because an increase in government expenditure increases disposable income. B. When both government expenditure and taxes decrease by​ $1, aggregate demand decreases. C. The balanced budget multiplier is the magnification effect on aggregate demand of a simultaneous increase in aggregate demand and an equal decrease in taxes. D. The balanced budget multiplier is equal to zero.

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14 The​ ______ passes the budget acts in​ ______. A. ​Congress; January B. ​President; January C. ​Congress; September D. ​President; September The federal budget in 2014 was in surplus. A. True B. False

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31 The economy is in a boom and the inflationary gap is large. Discretionary fiscal policy that might occur is​ ______. A. an increase in government expenditure and a cut in taxes B. a decrease in government expenditure and an increase in taxes C. a decrease in​ needs-tested spending and an increase in induced taxes D. an increase in​ needs-tested spending and a fall in induced taxes E. a decrease in government expenditure and a cut in taxes

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28 Which of these statements is true about using fiscal policy to stabilize the economy? Fiscal policy is used more often than monetary policy when the economy is in a recession. It is easier to get the timing right for implementing fiscal policy than for monetary policy. The delay caused by the legislative process is typically longer for fiscal policy than for monetary policy.

ANSWER (not Fiscal policy is used more often than monetary policy when the economy is in a recession.) The delay caused by the legislative process is typically longer for fiscal policy than for monetary policy. When using government policy to stabilize the economy, the delay caused by the legislative process is typically longer for fiscal policy than for monetary policy. Getting the timing right can be more difficult with fiscal policy than with monetary policy because fewer people are involved in making decisions about monetary policy. Fiscal policy requires agreement from the majority of the 535 members of Congress and the President. For this reason, the debate surrounding passage of fiscal stabilization policy can take a very long time. Monetary policy can be changed at any meeting of the Federal Reserve's Federal Open Market Committee and implemented immediately. Monetary policy is used much more frequently than fiscal policy during recessions. Additional Learning The Fed's quick actions in the recent credit crunch saved the economy from a financial meltdown. If Congressional action had been required it would have been too late to save the financial system.

18 Every time the federal government runs a budget deficit, the Treasury must: ANSWER supply funds in the federal funds market. print money in order to finance the excess expenditures. borrow funds from savers by selling U.S. Treasury securities.Every time the federal government runs a budget deficit, the Treasury must: supply funds in the federal funds market. print money in order to finance the excess expenditures. borrow funds from savers by selling U.S. Treasury securities.

ANSWER (not print money in order to finance the excess expenditures.) borrow funds from savers by selling U.S. Treasury securities. Every time the federal government runs a budget deficit, the Treasury must borrow funds from savers by selling U.S. Treasury securities. The U.S. Treasury finances the deficit by selling bonds and uses the bond proceeds to fund government operations. The money supply is controlled by the Federal Reserve and the Treasury does not have the authority to print more money without a Fed directive. The federal funds market is the market where banks lend each other money overnight to meet reserve requirements.

09 All the programs that Congress authorizes on an annual basis, which are not automatically funded by the prior laws passed by Congress, are called __________. entitlements mandatory spending discretionary spending

ANSWER discretionary spending All the programs that Congress authorizes on an annual basis, which are not automatically funded by the prior laws passed by Congress, are called discretionary spending. This category includes defense spending, the EPA, the State Department and a host of other programs. Entitlement spending, or mandatory spending, includes all spending that has been authorized by prior law. Unless Congress opts to change the law this spending must be maintained. Social Security in one example of mandatory or entitlement spending.

When the economy is in a recession, the government can: increase government purchases or decrease taxes in order to increase aggregate demand. reduce expenditures and leave taxes constant in order to stimulate aggregate demand. decrease government purchases or increase taxes in order to decrease aggregate supply.

ANSWER increase government purchases or decrease taxes in order to increase aggregate demand. When the economy is in a recession, the government can increase government purchases or decrease taxes in order to increase aggregate demand. Because changes in government purchases and taxes lead to changes in aggregate demand, they can affect the level of real GDP, employment, and the price level. When the economy is in recession, the government can stimulate aggregate demand by increasing purchases or putting more money in consumers' pockets to spend via a tax cut. Cutting government expenditures while holding taxes constant will push the economy deeper into recession. The lower purchases and higher taxes will not impact aggregate supply.

04 The national debt is best measured as the: value of all debts of private citizens and businesses. total value of stocks issued in a country. total value of U.S. Treasury securities outstanding.

ANSWER total value of U.S. Treasury securities outstanding. The national debt is best measured as the total value of U.S. Treasury securities outstanding. The national debt refers to the federal government debt which is the accumulation of all the federal budget deficits over time. The federal government finances this debt through issuing U.S. Treasury securities so the total value of U.S. Treasury securities is the best measure of the national debt. The other two measures have nothing to do with the national debt but are instead related to private debt and equity securities. Additional Learning The current total national debt is about $16 trillion.