Chapter 11 & 12

If policymakers use fiscal policy to reduce inflation, which of the following will most likely happen in the short run?

The unemployment rate will increase

Fiscal policy is:

The use of budget levers to influence the macroeconomy

The fiscal agent of the U.S. government is the:

U.S. Treasury

Which of the following is an income transfer?

Unemployment benefits paid to a factory worker who was laid off

A budget surplus is:

an excess of government revenues over government expenditures in a given time period

If the economy is in a severe recession, the most expansionary fiscal policy would be to:

decrease personal income taxes and increase government spending by equal amounts

Deficit spending results whenever the government:

finances expenditures that exceed tax revenues

Assume the MPC is 0.75. The change in total spending for the economy due to a $150 billion government spending increase is:

$600 billion

Suppose the consumption function is C = 100 + 0.80 Yd. If the government stimulates the economy with $200 billion in increased income transfers, aggregate expenditure would rise by:

$800 billion

The balanced budget multiplier is equal to:

1

Suppose the consumption function is C = 100 + 90 Yd. If. the government stimulates the economy with $100 billion in increased government purchases, aggregate expenditures will rise by:

1,000 billion

If the multiplier equals 2 and the AD shortfall is $6 million, the desired fiscal stimulus is

3 million

Which of the following is an example of an expansionary fiscal policy

An increase in government expenditures

If wages are sticky, which of the following policies will be the most effective in raising real gross domestic product to the full-employment level?

An increase in government spending

An inflationary gap could be reduced by:

An increase in the income tax rate

Crowding out(inflation)

Assume deficit spending/recession, G borrows, interest rates increase, private sector interest go down

Crowding in(recession)

Assume economy is turning around, decrease in G borrowing, interest rates down, private sector interest rates go down

An increase in the government budget deficit is most likely to result in an increase in which of the following? Responses A The marginal propensity to consume B Exports C The real interest rate D The money supply E The simple multiplier

C The real interest rate

Crowding out due to government borrowing occurs when Responses A lower interest rates increase private sector investment B lower interest rates decrease private sector investment C higher interest rates decrease private sector investment D a smaller money supply increases private sector investment E a smaller money supply decreases private sector investment

C higher interest rates decrease private sector investment

Crowding out refers to the decrease in Responses A national output caused by higher taxes B domestic production caused by increased imports C private investment due to increased borrowing by the government D employment caused by higher inflation E exports caused by an appreciating currency of a country

C private investment due to increased borrowing by the government

If a nation's government cuts income taxes, how will consumption spending, real output, and unemployment change in the short run?

Consumption spending will increase, real output will increase and unemployment will decrease

A tax cut:

Contains less fiscal stimulus than an increase in government spending of the same size.

An increase in private-sector borrowing and spending caused by decreased government borrowing is known as:

Crowding in

In order to maintain a balanced budget every year during a recession, the government must:

Decrease spending or increase taxes or both

Assume the economy is operating below full employment. Which of the following policy actions will allow aggregate spending to increase but will not increase the size of the government in the process?

Decrease tax rates and leave government spending unchanged

Which of the following is an appropriate fiscal policy prescription for the government to follow?

Deficit expansion in an inflationary gap

The elements of the federal budget not determined by past legislative or executive commitments are

Discretionary fiscal spending

An increase in government spending financed by borrowing will result in which of the following? Responses A Private savings will decrease in the short run. B The real interest rate will decrease in the short run. C Interest-sensitive private sector spending will increase in the short run. D Potential real output will increase in the long run. E The rate of physical capital accumulation will decrease in the long run.

E The rate of physical capital accumulation will decrease in the long run.

Which of the following does not cause the national debt to increase

Exports

Crowding in is the result of:

Falling interest rates

The use of government taxes and spending to alter economic outcomes known as:

Fiscal Policy

In contrast to the structural deficit, the cyclical deficit reflects:

Fluctuations in economic activity

Assume that the country of Alpha has a balanced budget. If the government and central bank of Alpha implement expansionary fiscal and monetary policies in order to address a recession, what effect would these policies have in the short run on the government budget and interest rates?

Government Budget moves toward deficit Interest Rates: Indeterminate

An appropriate fiscal policy to combat a recession would be to increase which of the following?

Government spending

An increase in which of the following will increase aggregate demand

Government spending

If the multiplier is 5 and a change in fiscal policy leads to a $500 million decrease in total spending, we can conclude that:

Government spending decreased by $100 million

Which of the following policies will definitely increase the budget deficit, while achieving greater fiscal stimulus?

Greater government expenditure and lower taxes

Which of the following represents the use of fiscal policy to achieve fiscal stimulus

Greater government expenditure or lower taxes

Which of the following combinations changes in government spending and taxes is necessarily expansionary

Increase in government spending and decrease in taxes

Which of the following is not considered to be a desirable use for a budget surplus in the U.S.

Investing the surplus in the stock market

Which of the following is a possible limitation of fiscal policy

Its outcome could be delayed because of implementation lags

The amount of additional income generated by increased government spending depends on the:

Marginal propensity to consume

Much of each year's federal budget is considered "uncontrollable" because

Most of the current revenues and expenditures are the result of decisions made in prior years

Assume that the economy is in long-run equilibrium. A shift in AD change

Only the price level in the long run

If, at full employment, the government wants to increase its spending by $100 billion without increasing inflation in the short run, it must do which of the following?

Raise taxes by more than $100 billion

Automatic Stabilizers:

Respond automatically and countercyclically to changes in national incomes

Assume the MPC is 0.90. If the government. increases spending by $400 billion and increases taxes by $400 billion simultaneously, then aggregate demand will:

Shift to the right by $400 billion

Fiscal policy works primarily through

Shifts of the AD curve

If full-employment output exceeds desired spending, greater deficit spending will result in a:

Smaller recessionary gap

The actual deficit equals the sum of the:

Structural and cyclical deficits.

Which of the following describes a budget deficit?

Tax revenues fall short of expenditures over the fiscal year

Interest rate induced crowding out is most likely when:

The economy is near capacity

In order to reduce the U.S. Debt:

The government should spend less than it collects in tax revenues

Nearly half of the federal government's tax revenues come from:

Individual Income tax

Assuming the marginal propensity to consume is less than 1, which of the following describes why the magnitude of the tax multiplier is smaller than the magnitude of the expenditure multiplier? Responses A Changes in income taxes initially affect both household consumption and household savings. B Changes in income taxes initially affect household savings only. C Changes in income taxes initially affect net investment instead of consumption. D Changes in income taxes initially affect exports only. E Changes in income taxes initially affect firms only.

A Changes in income taxes initially affect both household consumption and household savings.

Which of the following statements best describes the concept of an automatic stabilizer? Responses A It is nondiscretionary fiscal policy that mitigates business cycles by increasing aggregate demand during recessions and decreasing aggregate demand during expansions. B It is discretionary fiscal policy that increases government spending during recessions and decreases government spending during expansions. C It is a measure of the effect that a change in government spending and investment has on the gross domestic product. D It is a description of how total income is always equal to total expenditures as a measure of gross domestic product. E It is the process whereby surpluses lead to falling prices and shortages lead to rising prices to stabilize market equilibrium.

A It is nondiscretionary fiscal policy that mitigates business cycles by increasing aggregate demand during recessions and decreasing aggregate demand during expansions.

Which of the following is the most powerful way to shift the aggregate spending curve to the right?

A $1 increase in government purchases

The recessionary GDP gap will differ from the AD shortfall when the:

Aggregate supply curve slopes upward

Which of the following will cause an increase in aggregate demand? Responses A An increase in the price level B A decrease in income taxes C An increase in the demand for money D A decrease in the supply of money E A decrease in government transfer payments

B A decrease in income taxes

A country's government runs a budget deficit when which of the following occurs in a given year? Responses A The amount of new loans to developing nations exceeds the amount of loans paid off by developing nations. B Government spending exceeds tax revenues. C The debt owed to foreigners exceeds the debt owed to the country's citizens. D The amount borrowed exceeds the interest payment on the national debt. E Interest payments on the national debt exceed spending on goods and services.

B Government spending exceeds tax revenues.

Which of the following is true about the national debt of the United States? Responses A It is the debt owed to foreign investors. B It is the accumulation of past and current budget deficits and surpluses. C It increases when gross domestic product increases. D It increases when exports decrease, and decreases when exports increase. E It did not exist before 1980.

B It is the accumulation of past and current budget deficits and surpluses.

Which of the following statements about the fiscal budget deficit and government debt is correct? Responses A The deficit is the accumulation of the debt over a given period. B The debt is the accumulated value of government deficits and surpluses in the past. C The deficit is measured at a point in time, while the debt is measured over an interval of time. D A country with a large debt must also currently have a large deficit. E The debt measures the difference between expenditures and receipts of the government over a year.

B The debt is the accumulated value of government deficits and surpluses in the past.

Crowding out is best described as which of the following? Responses A The decrease in full-employment output caused by an increase in taxes B The decrease in consumption or private investment spending caused by an increase in government spending C The decrease in government spending caused by a decrease in taxes D The increase in the amount of capital outflow caused by the increase in government spending E The increase in the amount of capital inflow caused by the increase in government spending

B The decrease in consumption or private investment spending caused by an increase in government spending

Assume the government reduces its spending and raises income taxes in an effort to reduce the budget deficit. The most likely short-run result will be an increase in Responses A interest rates B unemployment C the money supply D the price level E personal savings

B unemployment

Which of the following is most likely to cause a budget surplus?

Balancing the budget when the economy is in a recession

If equilibrium GDP is less than potential GDP, which of the following is a fiscal policy action that could move the economy to long-run equilibrium? Responses A An increase in taxes B An increase in the money supply C An increase in government spending D A decrease in transfer payments E A decrease in business income tax credits

C An increase in government spending

Crowding out is most likely to occur with which of the following changes? Responses A Decrease in government spending B Increase in budget surplus C Increase in budget deficit D Decrease in the real interest rate E Decrease in trade deficit

C Increase in budget deficit

If the economy is in a severe recession, which of the following policy actions is most appropriate? Responses A Keeping administered interest rates constant and reducing budget deficits B Decreasing government spending and taxes by the same amount C Increasing government spending and decreasing administered interest rates D Increasing both administered interest rates and taxes E Decreasing government transfer payments and increasing taxes

C Increasing government spending and decreasing administered interest rates

Which of the following is true about a country's national debt? Responses A It is the sum of the country's trade deficit and government budget deficit. B It increases when gross domestic product increases. C It increases when the country's government has a budget deficit. D It decreases when the country's exports exceed its imports. E It decreases when national savings decrease.

C It increases when the country's government has a budget deficit.

A decrease in which of the following would most likely move a balanced government budget to a deficit in the short run? Responses A Subsidies to farmers and corporations B The federal funds rate target C Transfer payments D Income tax revenues E Government purchases

D Income tax revenues

Which of the following will most likely occur if a government adopts an annually balanced budget rule that requires the government to eliminate any deficits or surpluses? Responses A Unemployment will be eliminated and prices will be stable. B The national debt will increase. C Business cycles will become more stable. D The automatic stabilizing effect of fiscal policy will be eliminated. E The government will be forced to spend less when there are surpluses.

D The automatic stabilizing effect of fiscal policy will be eliminated.

The national debt is:

Equal to the total stock of outstanding treasury bonds

If there was a federal budget surplus and the government decided to increase spending:

The budget surplus would get smaller