Macroeconomics Chapter 27
Select the answer below that best corrects the following statement: "A contractionary fiscal policy involves a decrease in government purchases or a decrease in taxes."
A contractionary fiscal policy involves the decrease of government purchases and/or an increase in taxes in order to decrease aggregate demand.
Which of the following is an example of an expansionary fiscal policy?
A decrease in taxes.
Suppose the economy is initially in long-run equilibrium. The government enacts a policy to decrease taxes. In the short-run, this expansionary fiscal policy will cause:
A shift from AD 1 to AD 2 and a movement to point B, with a higher price level and higher output.
A political commentator argues: "Congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are unpopular." Briefly explain whether you agree.
Agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy.
Select the answer below that best corrects the following statement: "An expansionary fiscal policy involves an increase in government purchases or an increase in taxes."
An expansionary fiscal policy involves the increase of government purchases and/or a decrease in taxes in order to increase aggregate demand.
Are federal expenditures higher today than they were in 1960?
As a percentage of GDP, federal expenditures have increased since 1960.
Are federal purchases higher today than they were in 1960?
As a percentage of GDP, federal purchases have decreased since 1960
What is a contractionary fiscal policy?
Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.
What is an expansionary fiscal policy?
Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.
The multiplier effect is only a consideration for increases in government purchases.
False
What is the difference between federal purchases and federal expenditures?
Federal purchases require that the government receives a good or service in return, whereas federal expenditures include transfer payments.
What is fiscal policy?
Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives
What is the difference between federal government purchases (spending) and federal government expenditures?
Government purchases are included in government expenditures.
Which of the following is not a correct comparison between an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
In the dynamic model, expansionary policy would be used when demand does not grow sufficiently; in the basic model, expansionary policy would be used when demand falls., If the economy is below full employment, expansionary fiscal policy will cause an increase in the price level in both models., The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static.
What changes should they make if they decide a contractionary fiscal policy is necessary?
In this case, Congress and the president should enact policies that decrease government spending and increase taxes.
If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes?
In this case, Congress and the president should enact policies that increase government spending and decrease taxes.
The graph to the right shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential GDP?
Increase government spending or decrease taxes.
Consider the figure to the right. An increase in government spending shifted the aggregate demand curve from AD 1AD1 to AD 2AD2. As a result, both price level and real GDP increased. What can be said, however, about the increase in real GDP?
It increased by less than indicated by a multiplier with a constant price level.
The federal government collected less in total individual income taxes in 1983 than in 1982. Can we conclude that Congress and the president cut individual income tax rates in 1983?
No. It could be that the economy contracted, so less income was earned and less was paid in tax.
After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?
No. The increase in defense spending after that date was designed to achieve homeland security objectives.
If Congress and the president are successful in keeping real GDP at its potential level in 2019, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action:
Real GDP will be higher, potential GDP is unchanged, the inflation rate will be higher, and the unemployment rate will be lower.
Who is responsible for fiscal policy?
The federal government controls fiscal policy.
If the short-run aggregate supply curve (SRAS) were a horizontal line, what would be the impact on the size of the government purchases and tax multipliers
The impact of the multiplier would be larger if the SRAS curve is horizontal.
Why does a $1 increase in government purchases lead to more than a $1 increase in income and spending?
Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending.
The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.
True
Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not increase?
Yes, because fiscal policy and monetary policy are separate things.
Was this piece of legislation an example of fiscal policy?
Yes, because the primary goal of the spending program was to stimulate the national economy.
Congress and the president enact a temporary cut in payroll taxes. This is an example of
a discretionary fiscal policy.
If the government cuts taxes in order to increase aggregate demand, the action is called
a discretionary fiscal policy.
The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of
an automatic stabilizer
The revenue the federal government collects from the individual income tax declines during a recession. This is an example of
an automatic stabilizer.
Changes in taxes and spending that happen without actions by the government are called
automatic stabilizers.
Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called
automatic stabilizers.
An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________.
contractionary; fall; fall
One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase
current income
___________ represent total government spending including goods, services, grants to state and local governments, and transfer payments.
government expenditures
_____________ are spending by the government on goods, services, and factors of production.
government purchases
Automatic stabilizers are
government spending and taxes that automatically increase or decrease along with the business cycle.
Since the 1950s, total government expenditures, as a percentage of GDP, have _____________ and total government purchases, as a percentage of GDP, have ________________
increased, decreased
The federal government's day-to-day activities include running federal agencies like the Environmental Protection Agency, the FBI, the National Park Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up
less than 10 percent of federal government expenditures
If government purchases were to decrease by $300 billion or if taxes were increased by $300 billion, the equilibrium level of real GDP would decrease by
more than $300 billion.
Which of the following is not a correct comparison between a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
none of the above are correct statements about the two models.
The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of
not a fiscal policy
The Federal Reserve sells Treasury securities. This is an example of
not a fiscal policy.
The federal government changes the required gasoline mileage for new cars. This is an example of
not a fiscal policy.
Economists use the term fiscal policy to refer to changes in taxing and spending policies
only by the federal government
The higher the tax rate, the_____ the multiplier effect.
smaller
A spokesperson for the California state agency in charge of the project mentioned that the Caldecott tunnel project would have a "ripple effect" on employment. The ripple effect meant that
the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers.
As the tax rate increases,
the multiplier effect decreases
The major cause of these trends is
there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance.
The goal of expansionary fiscal policy is
to increase aggregate demand.
Which of the following are categories of federal government expenditures?
transfer payments
When the economy is experiencing a recession automatic stabilizers will cause:
transfer payments to increase and tax revenues to decrease.
Since World War II, the federal government's share of total government expenditures has been between
two-thirds and three-quarters.
Two examples of automatic stabilizers in the U.S. are
unemployment insurance payments and the progressive income tax system.
Automatic stabilizers can reduce the severity of a recession because, during a recession,
unemployment payments rise and tax collections fall, providing more spending ability to push the economy back to full employment.
Over time, potential GDP ________, which is shown by the ________ curve shifting to the right
increases; long-run aggregate supply
