Chapter 11.2, 11.3,11.4

_____ cause gross domestic product (GDP) to fluctuate less than it otherwise would, and therefore, disposable income and consumption vary proportionately less than GDP.

Automatic stabilizers

Which of the following correctly describes the difference between classical economists and Keynesian economists?

Classical economists believe in the flexibility of wages and prices to ensure full employment of resources, while the Keynesian economists believe that prices and wages are relatively inflexible.

_____ advocated laissez-faire. In contrast, _____ argued that prices and wages were not flexible enough for markets to self-adjust and advocated discretionary fiscal policy.

Classical economists; Keynes

Suppose an economy is producing at its potential output. The rate of unemployment corresponding to this output level is 4 percent. However, the government mistakenly believes the natural rate of unemployment to be 2 percent and increases its spending and lowers taxes. This will:

Create an expansionary gap.

Which of the following developments following the Great Depression bolstered the use of discretionary fiscal policy in the United States?

Increased production and zero cyclical unemployment during World War II. a. Increased production and zero cyclical unemployment during World War II.

Which of the following is true of discretionary fiscal policy?

It is a demand-management policy.

Which of the following is likely to be true if the federal budget deficit grows too large?

It will be difficult for the government to justify implementing expansionary fiscal policies.

Which of the following is likely to occur if higher unemployment benefits are funded by higher taxes on earnings?

Supply of labor will decrease in an economy.

Which of the following events strained belief in the economy's ability to self-correct by way of price adjustment, leading to the development of discretionary fiscal policy in the 1930s?

The Great Depression.

Temporary changes in tax rates as a tool of macroeconomic stabilization are likely to be less effective in an economy as:

consumers base their spending decisions on permanent income.

Which of the following correctly describes how an automatic stabilizer will function?

d. During an economic expansion, incomes rise and a progressive income tax claims a larger portion of income, slowing growth in disposable income.

Classical economists believe that:

discretionary policy could do more harm than good in an economy.

Political business cycles are economic fluctuations that occur when:

discretionary policy is manipulated for political gain.

The $117 billion tax-rebate program of the U.S. government in early 2008 showed that:

households saved most of their increase in income.

Permanent income is the:

income an individual expects on an average over the long term.

There was a change in the dynamics of the federal budget in the mid-90s in the United States due to a(n):

increase in consumer spending.

Higher taxes on the rich and better spending discipline resulted in a(n) _____ in the United States between 1993 and 1998.

increase in tax revenues and a decrease in federal outlays

The large federal budget deficits in the 1980s and the first half of the 1990s:

reduced the use of discretionary fiscal policy as a tool for macroeconomic stabilization.

Keynesian theory and policy were developed in response to:

the problem of high unemployment during the Great Depression.

If authorities believe that the natural rate of unemployment is lower than it actually is and pursue fiscal policies to move economic output to what they believe full employment to be, then which of the following is most likely to occur in the long run?

An increase in the inflation rate.

Identify the correct statement about budget surplus.

The federal surplus increased from $69 billion in 1998 to $236 billion in 2000.

Which of the following is true of automatic stabilizers during a recessionary period in an economy?

There is an increase in the flow of unemployment payments from the insurance fund to the unemployed, thereby increasing consumption and aggregate demand.

Suppose the government increases unemployment benefits and finances unemployment benefits through higher taxes. Which of the following is likely to happen if the marginal propensity to consume is the same for both employed and unemployed groups of people?

There will be no change in aggregate demand and the equilibrium real GDP.

Which of the following is true of automatic stabilizers and discretionary fiscal policies?

These affect an individual's incentive to save and invest.

Stagflation refers to a period of:

a. very high inflation and unemployment rates.

Demand-management policies are not able to deal with stagflation as:

an increase in aggregate demand will increase inflation, while a decrease in aggregate demand will increase unemployment.

The U.S. economy experienced stagflation during the 1970s. There was a _____ during this period.

leftward shift of the aggregate supply curve because of crop failures around the world and high oil prices

The rate of unemployment in an economy when it is producing its potential GDP is known as the _____.

natural rate of unemployment

Incumbent presidents use expansionary policies to stimulate an economy during election years to reap the benefits of a(n) _____.

political business cycle