Quiz 6

The multiplier effect of government purchases of goods and services:

has a more direct and bigger impact than an equal amount of tax changes.

Government borrowing will not crowd out private investment spending if unemployment is:

high and the fiscal expansion causes an increase in incomes and saving at each interest rate.

Time lags associated with policy decision making and implementation suggest that:

increases in spending to fight a recessionary gap may occur too late.

Contractionary fiscal policy includes:

raising tax rates.

Automatic stabilizers act like:

automatic expansionary fiscal policy when the economy is in a recession.

Government spending and taxation changes that cause fiscal policy to be expansionary when the economy contracts and contractionary when the economy expands are known as:

automatic stabilizers.

Suppose the economy is operating at an output level of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. Which would be required to close this recessionary gap?

$250 billion increase in government spending

If the MPC is 0.8 and government spending decreases by $50 million, then equilibrium GDP will decrease by:

$250 million.

Suppose the government increases spending to fund tuition assistance for qualified college students. Which is likely to result?

Automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand.

Suppose the economy is operating at an output level of $5,400 billion. Assume furthermore that potential output is $5,000. Which would be necessary to close this inflationary gap if the marginal propensity to consume is 0.75?

Decrease spending by $100 billion

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $850 billion, which policy would bring the economy to potential output?

Increase taxes by $12.5 billion.

The U.S. government fiscal year runs from _____ to _____ of the following calendar year.

October 1; September 30

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which would most likely result?

The economy could move into a recession.

Lyndon Johnson's tax surcharge was a(n):

contractionary fiscal policy that shifted aggregate demand to the left.

Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the MPC is equal to 0.80. Then the government should follow a policy of:

cutting taxes by $25 billion to bring the economy to potential output

A contractionary fiscal policy:

decreases a government budget deficit or increases a government budget surplus.

Spending promises that are made by the government, and are effectively a debt, are known as

implicit liabilities.

If the marginal propensity to consume is 0.9, then the tax multiplier will be:

less than 10.

Time lags in the implementation of fiscal policy:

must be considered by policy makers in the implementation of fiscal policy.

Discretionary fiscal policy involves:

using government spending or tax policy to affect aggregate demand.