Macro Final; Chapter 16
The increase in the amount the government collects in taxes when the economy expands and the decrease in the amount the government collects in taxes when the economy goes into a recession is an example of
automatic stabilizers.
If the tax multiplier is minus−1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding all else constant? (You may assume the price level stays constant.)
a $300 billion decrease in GDP
Fiscal policy refers to changes in
federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
The crowding out of government spending by private spending will be greater the
more sensitive consumption, investment, and net exports are to changes in interest rates.
An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by
more than $200 billion.
Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to increase government purchases by
less than $500 billion.
Crowding out refers to a decline in ________ as a result of an increase in ________.
private expenditures; government purchases
During recessions, government expenditure automatically
rises because of programs such as unemployment insurance and Medicaid.
Expansionary fiscal policy will
shift the aggregate demand curve to the right.
An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate ________ the government purchases multiplier.
will decrease
An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.
decrease; rise; fall
Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
higher; higher
A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments _________.
increase; fall; rise
Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be _________.
lower; lower
Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment.
taxes; expenditures
Refer to the diagram to the right. An increase in taxes would be depicted as a movement from _______, using the static AD−AS model.
B to A
Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?
an increase in government purchases
If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy?
an increase in taxes
The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of
automatic stabilizers.
An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may
All of the above are correct.
Which of the following would be classified as fiscal policy?
The federal government cuts taxes to stimulate the economy.
Historically, the largest U.S. federal budget deficits as a percentage of GDP in the 20th century occurred during
WWI and WWII.
To combat a recession with discretionary fiscal policy, Congress and the president should
decrease taxes to increase consumer disposable income.
The government purchases multiplier equals the change in ________ divided by the change in ________.
equilibrium real GDP; government purchases
The tax multiplier equals the change in ________ divided by the change in ________.
equilibrium real GDP; taxes
If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in
government purchases.
Automatic stabilizers refer to
government spending and taxes that automatically increase or decrease along with the business cycle.
From the 1960s to 2014, transfer payments
have risen from 25 percent to about 48 percent of federal government expenditures.
Government deficits tend to increase during
periods of war and recession.
Which of the following is considered contractionary fiscal policy?
Congress increases the income tax rate
Which of the following would be considered a fiscal policy action?
A tax cut is designed to stimulate spending during a recession.
Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD−AS model in the diagram to the right, this would be depicted as a movement from
A to B.
Suppose the economy is in short run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long run equilibrium. Using the static AD−AS model in the diagram to the right, this would be depicted as a movement from
A to B.
Suppose the economy is in short run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a movement from ___ using the static AD−AS model in the diagram to the right.
C to B
Suppose the economy is in short run equilibrium above potential GDP and no policy is pursued. Using the static AD−AS model in the diagram to the right, this would be depicted as a movement from
C to D.
The government purchases multiplier is defined as
Change in equilibrium real GDP divided by Change in government purchases
If the federal government's expenditures are less than its tax revenues, then
a budget surplus results.
Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the price level is not held constant?
a decrease of less than $80 billion
The federal government debt as a percentage of GDP fell
from 1998-2001
Crowding out, following an increase in government spending, results from (the exchange rate is the foreign exchange price of the domestic currency)
higher interest rates and a higher exchange rate.
During 1970−1997, the U.S. federal government was
in deficit every year.
Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant
increase in inflation.
Expansionary fiscal policy involves
increasing government purchases or decreasing taxes.
The largest source of federal government revenue in 2014 was
individual income taxes.
The three categories of federal government expenditures, in addition to government purchases, are
interest on the national debt, grants to state and local governments, and transfer payments.
The federal government debt equals
the total value of U.S. Treasury bonds outstanding.
The largest and fastestminus−growing category of federal government expenditures is
transfer payments.
