Macroeconomics Ch. 13

Social Security and Medicare are "pay-as-you-go" plans. This means that

most of the current revenues from the Social Security tax are paid to current Social Security retirees.

During the recession of 2007−2009, the U.S. Federal government's tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?

Yes

The Council of Economic Advisers (CEA) advises the President on

economic matters, and provides recommendations for discretionary fiscal policy action

The standardized budget measures what the Federal deficit or surplus would be if the economy reached the ___________ level of GDP.

full-employment

Refinancing of the public debt might drive up real interest rates because

government borrowing to finance the debt increases demand for funds and competes with private borrowing

Social Security and Medicare trust funds are projected to be depleted by

2037 and 2017 respectively.

What type of tax system would have the most built-in stability?

A progressive tax because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes.

Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. c. A sudden recession is recognized by politicians, but it takes many months of political deal making before a stimulus bill is finally approved.

Administrative lag

Which of the following would help a government reduce an inflationary output gap?

Decreasing government spending. Raising taxes.

What are the two ways to measure the public debt?

Its absolute dollar size and as a percentage of GDP

Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. a. To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin.

Operational lag

Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. d. To fight a recession, the president issues an executive order requiring Federal agencies to get rid of petty regulations that burden private businesses—but the Federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.

Operational lag

Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap. Given that full employment exists at $5,000, does a recessionary gap or inflationary gap exist?

Recessionary gap

Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. b. Distracted by a war that is going badly, inflation reaches 8 percent before politicians take notice.

Recognition lag

For a person who thinks the public sector is too large, the fiscal options for ending severe demand-pull inflation would include

a cut in government spending.

True or false? a. The total public debt is more relevant to an economy than the public debt as a percentage of GDP. b. An internally held public debt is like a debt of the left hand owed to the right hand. c. The Federal Reserve and Federal government agencies hold more than three-fourths of the public debt. d. The portion of the U.S. debt held by the public (and not by government entities) was larger as a percentage of GDP in 2009 than it was in 2000. e. As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced industrial nations

a. False b. True c. False d. True e. False

The key long-run problem of both Social Security and Medicare is the

aging, and the age distribution, of the U.S. population.

For a person who wants to preserve the size of government, the fiscal options for ending severe demand-pull inflation would include

an increase in taxes

Social Security and Medicare trust funds are

assets held by these programs to help pay for future projected tax revenue shortfalls.

An internally held debt is one in which the

bondholders live in the nation having the debt.

Expectations of a near-term policy reversal weaken fiscal policy because

consumers may hesitate to increase their spending because they believe that tax rates will rise again.

If the standardized budget is balanced, the

government is not engaging in either expansionary or contractionary policy.

Refinancing of the public debt might cause

higher interest rates that can lower investment and economic growth.

The problem of time lags in enacting and applying fiscal policy is that

in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed

Paying off an externally held debt

may lower the dollar exchange rate

The ratchet effect makes anti-inflationary policy

more difficult

Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession. This is because when the economy enters a recession,

net tax revenue falls and transfer payments rise. Balancing the budget would require lowering transfer payments and raising taxes

Paying off an internally held debt would

not burden the economy as a whole.

A political business cycle is the concept that

politicians are more interested in reelection than in stabilizing the economy.

If the public investment financed through borrowing complements private investment,

private borrowers may be willing to pay higher interest rates associated with financing the public debt.

The government's fiscal policy options for ending severe demand-pull inflation include

reducing government spending, increasing taxes, or both.

The crowding-out effect is the

reduction in investment spending caused by the increase in interest rates, arising from an increase in government spending

Refinancing the public debt means

selling new bonds to retire maturing bonds.

Built-in, or automatic, stabilizers work by changing ______ so that GDP changes are reduced.

taxes and government payouts

The distinction between the absolute and relative sizes of the public debt is important because

the absolute size doesn't tell you about an economy's capacity to repay the debt.

If the annual interest payments on the debt sharply increased as a percentage of the GDP,

the government would have to use tax revenues or go deeper into debt.

Consider the following statement: "Although fiscal policy clearly is useful in combating the extremes of severe recession and demand-pull inflation, it is impossible to use fiscal policy to fine-tune the economy to the full-employment, noninflationary level of real GDP and keep the economy there indefinitely." This statement recognizes that

the impact of fiscal policy will affect the economy differently depending on the timing of the policy and the severity of the situation