Ch. 13-preview
According to economists, which of the following are substantive and valid concerns related to the U.S. public debt?
-Income distribution -Incentives -Crowding out -Foreign-owned public debt
Which of the following tools of fiscal policy are used to positively stimulate an economy?
-Increased government spending -Tax reductions
Which are included in the definition of "public" in regard to the holders of federal debt
-Local governments -State governments
Which of the following are used to describe policy changes that occur without congressional action?
-Nondiscretionary -Passive -Automatic
Historically, which of the following are reasons that a large U.S. public debt might not threaten to bankrupt the federal government?
-Taxation -Refinancing
Which of the following are types of U.S. securities?
-U.S. savings bonds -Treasury bonds -Treasury bills -Treasury notes
What is the result of an increase in aggregate demand that occurs along the short-run aggregate supply curve where the price level does not rise?
Real output rises by the full extent of the multiplier.
Distracted by a war that is going badly, politicians take no notice until inflation reaches 8 percent.
Recognition lag
With a large interest payment to service public debt, higher taxes may be required. What may be the result of higher taxes?
Reduced incentive to take risk, innovate, invest, and work
Which of the following best describes the public debt of most industrialized nations?
Sometimes large
How would an economist describe concerns related to income distribution and foreign-owned public debt?
Substantive
The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand and raising taxes simultaneously to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is:
a mediocre and contradictory combination of tax and expenditure changes.
The difference between the progressive, proportional, and regressive tax systems is the way the (blank) tax rate responds to changes in GDP.
average
If the economy starts out with a balanced federal budget, a subsequent expansionary fiscal policy will create a ______.
budget deficit
The more progressive the tax system, the greater the economy's ______.
built-in stability
Restrictive fiscal policy is also known as (blank) fiscal policy.
contractionary
U.S. public debt held by foreigners is also known as ______ public debt.
external
True or false: An increase in aggregate demand along the flat portion of the short-run aggregate supply curve will result in an increase in the price level without much effect on real output.
false
True or false: Governments rarely have significant problems in enacting and applying fiscal policy.
false
True or false: The up-sloping aggregate supply curve means that leftward shifts of AD result only in demand-pull inflation rather than increased output.
false
Discretionary (blank) policy consists of deliberate changes in government spending and taxation designed to achieve full employment, control inflation, and encourage economic growth.
fiscal
The crowding-out effect is a potential flaw or result of expansionary (blank) policy.
fiscal
The federal government's purposeful manipulation of taxes and spending in order to "stimulate the economy" or "rein in inflation" is known as ______ policy.
fiscal
The manipulation of taxes and federal spending in order to stimulate the economy or reduce inflation is known as expansionary or contractionary (blank) policy
fiscal
The recognition, administrative, and operational lags are some of the problems faced by the government related to (blank) policy.
fiscal
The total amount of money owed by the United States Treasury to holders of U.S. securities is the total ______.
public debt
A decrease in aggregate demand will cause a decrease in ______.
real GDP
Expansionary fiscal policy is used in response to the economy being in what state?
recession
An economy producing below potential output is considered to be operating in a(n) (blank) gap.
recessionary
Government's fiscal policy options for ending severe demand-pull inflation include
reducing government spending, increasing taxes, or both.
Further tax (blank) were passed in 2002 totaling $122 billion over two years.
reductions
In a(n) (blank) tax system, the average tax rate falls as GDP rises.
regressive
Automatic changes in tax (blank) provide built-in stability over the course of the business cycle.
revenues
Tax revenues automatically (blank) and the budget moves from deficit toward surplus as the economy moves toward a higher GDP.
rise
To positively stimulate an economy using fiscal policy, government spending should ______, and taxes should ______.
rise; fall
As GDP rises, purchases, revenues, employment, and incomes all (blank). Thus, tax revenues from these activities (blank).
rise; rise
The U.S. government (blank) are financial instruments issued by the federal government to borrow money to finance expenditures that exceed tax revenues.
securities
The four types of U.S. government (blank) are Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.
securities
U.S. ______ are financial instruments issued by the federal government to borrow money to finance expenditures that exceed tax revenues.
securities
Refinancing the public debt means
selling new bonds to retire maturing bonds.
If government disregards or underestimates the multiplier effect, contractionary fiscal policy could cause aggregate demand to ______.
shift leftward further than potential output
The aggregate demand curve shifts by an amount greater than an initial change in government spending. This is caused by ______.
the multiplier effect
The built-in stability of an economy depends on ______.
the responsiveness of tax revenues to changes in GDP
True or false: It is common for countries to have public debts.
true
True or false: The United States owes a substantial portion of the public debt to itself.
true
True or false: The price level can remain stuck at its old level even when aggregate demand declines.
true
True or false: The public (excluding the Federal Reserve) holds a significant portion of the federal debt.
true
Fiscal policies of state and local government are frequently pro-cyclical in that they ______ the economy.
worsen
Paying off an internally held debt
would not burden the economy as a whole.
When tax revenues exceed government spending, it is called ______.
a budget surplus
Increasing which of these will cause an increase in aggregate demand?
Government spending
Taxes restrain economic expansion because they reduce what?
Household and business spending
The average tax rate remains constant as GDP rises in what kind of tax system?
Proportional
Economists recognize that governments may encounter a number of significant problems in doing what?
-Enacting fiscal policy -Applying fiscal policy
Assume that a hypothetical economy with an MPC of 0.8 is experiencing a severe recession. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion?
$5 Billion
If the desired initial increase in spending is $5 billion and the MPC is 0.75, then taxes must be cut by what amount?
$6.67 billion
Which of the following are lag problems faced by the government related to fiscal policy?
-Administrative -Operational -Recognition
Which of the following explain how an increase in GDP results in more tax revenue?
-As GDP rises, incomes increase. -As GDP rises, sales of goods and services increase.
Discretionary fiscal policy consists of deliberate changes in government spending and taxation designed to do which of the following?
-Control inflation -Achieve full employment -Encourage economic growth
Which of the following are fiscal tools that a government may use to eliminate an inflationary GDP gap?
-Decrease government spending -Raise taxes -A combination of both reduced government spending and higher taxes
In 2018 payments on the federal debt amounted to what percentage of GDP?
1.8%
In 2018, foreigners held what percentage of the total U.S. federal debt?
29%
Anything that increases the government's budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion without requiring explicit action by policymakers is called what?
A built-in stabilizer
______ thought to be temporary may not increase present consumption spending and aggregate demand as much as expected because people are preparing for a higher tax rate in the future.
A tax cut
Politicians recognize a sudden recession, but it takes many months of political deal making before they finally approve a stimulus bill.
Administrative lag
Why will an inflationary GDP gap cause further inflation?
Because input prices rise in the long run in order to meet the increase in output prices
Why would a tax reduction thought to be temporary not increase present consumption spending and aggregate demand as much as expected?
Because people are preparing for the expected higher tax rate in the future
Automatic changes in tax revenues over the course of the business cycle create what?
Built-in stability
Other things equal, an increase in government spending will have what effect on an economy's aggregate demand curve?
Cause it to shift out rightward
The multiplier process magnifies the initial change in spending through successive rounds of what?
Consumption spending
When demand-pull inflation occurs, what kind of fiscal policy may help control it?
Contractionary
What is another term for restrictive fiscal policy?
Contractionary fiscal policy
What term describes the idea that public borrowing drives up real interest rates, thereby reducing private investment spending?
Crowding-out effect
What do economists use to estimate the annual deficit or surplus that would occur under existing tax rates and government spending levels if the economy were to operate at full employment?
Cyclically adjusted budget
As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced industrial nations.
False
One must adjust deficits and surpluses to eliminate automatic changes in tax revenues in order to do what?
Evaluate the status of fiscal policy.
(blank) fiscal policy is used in response to recession.
Expansionary
What type of fiscal policy was enacted in the form of the Economic Stimulus Act of 2008?
Expansionary fiscal policy
The Federal Reserve and federal government agencies hold more than three-fourths of the public debt.
False
The total public debt is more relevant to an economy than the public debt as a percentage of GDP.
False
A declining (blank) leads to a tax receipt decline and moves the government's budget from surplus toward deficit.
GDP
In the U.S. tax system, net tax revenues vary directly with ______.
GDP
Tax revenues automatically rise and the budget moves from deficit toward surplus as the economy moves toward a higher ______.
GDP
______ due to the public debt is undesirable if greater income equality is one of society's goals
Income redistribution
b. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt.
Increase government spending by $ 25 billion Increase taxes by $25 billion
(blank) payments on the federal debt were 1.8% of GDP in 2018.
Interest
If investment demand is fixed and the interest rate rises from 6 to 10 percent as a result of servicing the public debt, what happens to private investment?
It declines.
Government corrects an inflationary gap by reducing government spending to decrease aggregate demand. What effect does this have on the aggregate demand curve?
It shifts left.
To whom does the United States owe the greatest portion of the public debt?
Itself
A reduction in government spending, in response to demand-pull inflation, shifts the aggregate demand curve in which direction?
Leftward
What type of tax system would have the most built-in stability?
Progressive tax system, because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes.
(blank) taxes are tax revenues minus transfers and subsidies.
Net
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
To fight a recession, the president orders 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
Fiscal policies of state and local government frequently worsen rather than correct recession or inflation. This is described as what?
Pro-cyclical
The average tax rate rises with GDP in what kind of tax system?
Progressive
How large a tax cut would be needed to achieve the same increase in aggregate demand?
Tax cut = $ 6.25 billion
A budget deficit is government spending in excess of what?
Tax revenues
As GDP rises during prosperity, what happens to tax revenues?
Tax revenues increase automatically.
Which of the following reduces household and business spending?
Taxes that restrain economic expansion
Which of the following is an example of a built-in stabilizer?
The U.S tax system
Which of the following is a potential flaw of fiscal policy?
The crowding-out effect
What happens to the price level when aggregate demand (AD) declines?
The price level remains the same.
How do cyclically adjusted budget deficits compare in size to actual budget deficits?
They are smaller.
Over the course of the business cycle, what happens to government tax revenues in order to stabilize the economy?
They rise or fall automatically.
Why were tax cuts totaling $122 billion over two years passed in 2002?
To further boost the economy and offset the recession
An internally held public debt is like a debt of the left hand owed to the right hand.
True
Suppose the full-employment, noninflationary level of real output is GDP3 (not GDP2) in the economy depicted in the figure. If the economy is operating at GDP2 instead of GDP3, its current fiscal policy is
contractionary, since a surplus would exist.
If the government wants to move the economy to full employment, it should
cut taxes or increase spending.
Payments of public (blank) to foreigners allows foreigners to buy some U.S. output.
debt
The total public debt represents the total amount of money owed by the federal government to holders of U.S. government (blank)
debt
If the desired initial increase in spending is $5 billion and the MPC is 0.75, then taxes must (increase/decrease) by $6.67 billion.
decrease
During a recession, the government can ______ taxes to increase consumption and shift the aggregate demand curve to the ______.
decrease, right
If the economy starts out with a balanced federal budget, a subsequent expansionary fiscal policy will create a budget (blank)
deficit
The U.S. public debt is essentially the accumulation of all past federal (blank) and (blank)
deficit; surpluses
A decrease in aggregate (blank) causes real GDP to decline.
demand
There is a(n) ______ relationship between U.S. net tax revenues and GDP.
direct
If greater income (blank) is one of society's goals, then redistribution of income resulting from the public debt is undesirable.
equality
The discretionary fiscal policy used to stimulate the economy is called (blank) fiscal policy
expansionary
In 2018, ______ held about 29% of the total U.S. federal debt.
foreigners
Economists use the cyclically adjusted budget to estimate the annual budget deficit or surplus that would occur under existing tax rates and government spending levels if the economy were to operate at (blank) employment.
full
The cyclically adjusted budget measures what the federal deficit or surplus would be if the economy reached the __________ level of GDP.
full-employment
An economy's potential output is also known as ______.
full-employment output
If the cyclically adjusted budget is balanced, then
government is not engaging in either expansionary or contractionary policy.
Over the course of the business cycle, ______ change automatically in ways that stabilize the economy.
government tax revenues
One way to increase aggregate demand is to (blank) government spending.
increase
When Congress passed the stimulus package in 2008, it caused the size of the cyclically adjusted budget deficit to (blank)
increase
With a large interest payment to service public debt, higher taxes may be required. Higher taxes may dampen incentives to bear risk, to innovate, to invest, and to work. These incentive reductions may ______.
indirectly impair economic growth
An inflationary GDP gap will cause further (blank) because input prices rise in the long run in order to meet the increase in output prices.
inflation
The up-sloping aggregate supply curve means that rightward shifts of aggregate demand result more in demand-pull (blank) than in increased output.
inflation
To correct a(n) (blank) GDP gap, the government would need to shift aggregate demand to the left.
inflationary
The government may reduce government spending or increase taxes in order to eliminate a(n) ______.
inflationary GDP gap
The two ways to measure the public debt are
its absolute dollar size and its relative size as a percentage of GDP.
Reduced government spending, in response to demand-pull inflation, shifts the aggregate demand (AD) curve to the (blank)
left
When an economy's output is (blank) than its potential output, the gap is known as a recessionary gap.
less
Cyclically adjusted budget deficits are generally (blank) than the actual budget deficits because actual budget deficits include cyclical deficits and cyclically adjusted budget deficits do not.
lower
Paying off an externally held debt
may lower the dollar exchange rate.
The (blank) process magnifies the initial change in spending into successive rounds of new consumption spending.
multiplier
The U.S. (blank) debt is the total accumulation of the deficits (minus the surpluses) the federal government has incurred over time.
national or public or federal or government
Tax revenues less transfers and subsidies are known as ______.
net taxes
Policy changes that occur without congressional action are known as (Blank) ,passive, or automatic.
nondiscretionary
Elected officials sometimes cause ______ business cycles in their attempts, through fiscal policy actions, to increase their chances of reelection.
political
An economy's (blank) output is also known as full-employment output.
potential
Disregarding the multiplier effect could cause contractionary fiscal policy to shift aggregate demand leftward to an amount below (blank) output.
potential
The more ______ the tax system, the greater the economy's built-in stability.
progressive
In a(n) (blank) tax system, the average tax rate rises with GDP, whereas in a(n) (blank) tax system, the average tax rate falls as GDP increases.
progressive; regressive
In a(n) (blank) tax system, the average tax rate remains constant as GDP rises.
proportional or flat
A built-in (blank) is anything that increases the government's budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion without requiring explicit action by policymakers.
stabilizer
Expansionary fiscal policy is used in order to ______ the economy.
stimulate
A budget occurs when tax revenues exceed government spending.
surplus
When the economy faces demand-pull inflation, fiscal policy should move toward a government budget (blank)
surplus
When the economy faces demand-pull inflation, fiscal policy should move toward a government budget ______.
surplus
A falling GDP leads to a tax receipt decline and moves the government's budget from ______ to ______.
surplus; deficit
Evaluating the status of fiscal policy requires adjusting deficits and surpluses to eliminate automatic changes in (blank) revenues.
tax
The built-in stabilizers of an economy depends on the responsiveness of (blank) revenues to changes in GDP.
tax
Built-in (automatic) stabilizers work by changing __________ so that changes in GDP 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.
An internally held debt is one in which
the bondholders live in the nation having the debt.
If the annual interest payments on the U.S. public debt sharply increased as a percentage of GDP, then
the government would have to use tax revenues or go deeper into debt.
Government spending is decreased by $5 billion and the resulting decline of aggregate demand is $20 billion. This is due to ______.
the multiplier
