Macro HW5
During a recession, rising transfer payments and falling tax collections
-help cushion households from the impact of the recession. -buffers the fall in real GDP (relative to a situation where transfer payments do not rise and tax revenues do not fall). -tend to increase or budget deficit or reduce a budget surplus.
According to Mankiw, What would Keynes have done in the recession of 2007-09?
. increase government spending
Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $12,000. What is the marginal propensity to consume?
0.6
Suppose the consumption function is C = $500 + 0.8Y. If Y = $1,000, what is the amount of consumption?
$1,300
Suppose that income taxes are increased by $600 billion. If the marginal propensity to consume is 0.75 and the spending multiplier is 4, by how much will the aggregate demand curve shift at a given price level?
$1,800 billion
Which of the following describes a discretionary fiscal policy action/program?
The government increases funding for the Dislocated Worker Program, a federal initiative that provides retraining and career counseling.
Which of the following statements is true about fiscal policy lags?
Unlike discretionary fiscal policy, automatic stabilizers respond automatically to changes in the economy, thus avoiding the recognition and implementation lags.
Which of the following is considered investment?
a brand new robot purchased for use on an automobile assembly line
A decrease in interest rates will cause
an increase in investment
All of the following are instruments of fiscal policy except
an interest rate cut. ( rebate on payroll taxes, education tax credits, unemployment insurance benefits.)
In the short run, the most important consequence of a decrease in investment is a(n)
decrease in aggregate demand.
A decrease in investment demand would most likely be caused by a
decrease in the expected demand for output.
The marginal propensity to consume is the
change in consumption divided by the change in disposable personal income.
A change in government purchases shifts the aggregate demand curve by an amount equal to the
change in government purchases x spending multiplier.
The bulk of aggregate demand in the United States consists of
consumption.
Discretionary fiscal policy refers to
deliberate government efforts to stabilize the economy through government spending and taxes.
Some economists argue that
discretionary fiscal policy is ineffective because of its long implementation lag.
All of the following are examples of transfer payments except
dividend payments to the wealthy. ( welfare benefits to the poor,Social Security payments to the elderly, unemployment compensation to the unemployed)
Government tax and expenditure policies put in place by the Federal government to stabilize the economy are called
fiscal policy
Supply-side economics is the school of thought that advocates the use of
fiscal policy to stimulate short-run aggregate supply.
The use of government expenditures and taxes to influence the level of economic activity is called
fiscal policy.
In the United States, most of the government's taxing and spending is
for purposes other than economic stabilization.
All of the following are examples of automatic stabilizers except
government emergency spending (personal income taxes, means-tested federal transfer payments, welfare benefits.)
Public investment expenditure for highways, schools, and national defense is included in which component of GDP?
government purchases
An increase in aggregate demand causes an increase in _______, which in turn induces an increase in _______.
income, consumption
The 2009 stimulus legislation, technically known as the American Recovery and Reinvestment Act included
tax cuts for families and businesses, increased transfer payments, like unemployment insurance, increased direct government spending, like infrastructure investment.
Which of the following best explains why a $10 billion tax cut is likely to have a smaller impact on aggregate demand than a $10 billion increase in government purchases?
tax cuts increase disposable income, some of which may be saved while all of the increased government spending is spent
The smaller the marginal propensity to consume,
the greater the value of the multiplier.
Disposable personal income is
the income households receive that is available for consumption and saving.
Which of the following contributes to implementation lag for discretionary fiscal policy?
the time it takes to secure bureaucratic approval for policy actions
If private sector investment does not respond much to interest rate changes, then
there will be less crowding out when expansionary policies are undertaken.
The immediate impact of instituting investment tax credits is
to stimulate private sector investments and increase aggregate demand.
An expansionary fiscal policy shifts the aggregate demand curve
to the right and is used to increase output
Medicaid, welfare payments, and Temporary Assistance to Needy Families are classified as
transfer payments.
Payments to households that do not require anything in exchange are called
transfer payments.
A recessionary gap can be closed with
using an expansionary fiscal policy.
What is equilibrium output and the multiplier in the following model? Consumption=100+.9Y Investment =100 Gov't Spending =100 Net Exports = 0
30,000
Automatic stabilizers tend to exaggerate the severity of business cycles.
False
Fiscal policy has a short implementation lag compared to monetary policy.
False
Higher interest rates encourage investment.
False
The national debt is the difference between current government expenditures and taxes.
False
What is an automatic stabilizer?
It refers to any government program that tends to reduce fluctuations in GDP automatically.
Which of the following is an advantage of automatic stabilizers?
There is no implementation lag for automatic stabilizers
An increase in business taxes is likely to reduce aggregate demand because of a decrease in private investment.
True
Net investment adds to the nation's capital stock
True
Transfer payments tend to rise automatically during a recession and fall automatically during an expansion.
True
An expansionary fiscal policy is likely to
increase borrowing by the Treasury through the sale of bonds
Contractionary fiscal policy includes
increasing taxes and decreasing government expenditures.
The government has a budget deficit if
its total revenues are less than its total expenditures.
The term "crowding out" refers to the phenomenon that occurs when increased government spending
leads to higher interest rates which reduces private investments.
The impact of fiscal policy is
magnified because of the multiplier and weakened because of crowding out.
The sum of all past federal deficits minus any surpluses is called the
national debt.
For the following model, if output is 1000 is the economy in equilibrium? Consumption=100+.5Y Investment =100 Investment =100 Gov't Spending =0 Net Exports = 0 Exports = 0
no, because D<Y
Taxes assessed on firms and employees on wages and salaries earned are called
payroll taxes.
During an economic downturn, households respond to a decline in income by
reducing consumption
The consumption function expresses the
relationship between consumption and disposable personal income.