Chapter 13

The purpose of the Employment Act of 1946 was to

establish goals for the federal government that would promote maximum employment, purchasing power, and production.

Prior to the Great Depression, the purpose of the federal budget was to ________.

finance the activities of the government

The present value of the government's commitments to pay benefits minus the present value of its tax revenues is called

fiscal imbalance

The system that measures the lifetime tax burden and benefits of each generation is called

generational accounting.

Splitting the fiscal imbalance between the current generation and future generations is called

generational imbalance

A reason the government expenditure multiplier is larger than 1 is because

government expenditure changes generate changes in consumption expenditure.

In order for the United States to repay its international debt, the United States would need to

have a surplus of exports over imports.

The Council of Economic Advisers

helps the president and the public stay informed about the state of the economy.

During an expansion, tax revenues ____ ____, while during a recession, tax revenues ________.

increase; decrease

The government budget deficit tends to decrease during the expansion phase of a business cycle because tax revenues ________ and government transfer payments ________.

increase; decrease

In October 2008, President Bush enacted the Alternative Minimum Tax Relief Act of 2008, which resulted in lower taxes on labor income. According the supply-side view, as a result of this act the incentive to work ________ and the tax wedge ________.

increases; decreases

Needs-tested spending ________ during recessions and ________ during expansions.

increases; decreases

A government that currently has a budget deficit can balance its budget by ________.

increasing tax revenues by more than it increases outlays

Fiscal policy

involves changing taxes and government spending.

To eliminate the fiscal imbalance the government could

lower benefits and increase tax rates.

During the Reagan administration in the 1980s, tax rates were ________ and the budget deficit ________.

cut; increased

"Obama Considers Delaying Tax Increase" "U.S. President-elect Barack Obama is considering delaying his proposal to repeal the Bush tax cuts for the wealthiest Americans in light of the economic downturn." www.nytimes.com 11/23/2008 Obama's possible decision to delay the tax increase recognizes the fact that a tax increase will ________ disposable income and ________ real GDP

decrease; decrease

Government transfer payments ________ during expansions and ________ during recessions.

decrease; increase

Tax revenues ________ during recessions and ________ during expansions

decrease; increase

An increase in the tax on interest income ________ the supply of loanable funds and ________ the equilibrium investment

decreases; decreases

In the above figure, which of the following policies could move the economy to potential GDP?

decreasing government expenditures and increasing taxes

The tax rebates passed by Congress in 2008 to help move the economy more rapidly toward potential GDP are an example of

discretionary fiscal policy

The stimulus package passed by Congress in 2009 to combat the recession is an example of

discretionary fiscal policy.

Suppose that the government increases taxes. One effect of this change is that it decreases

disposable income, which decreases consumption expenditure and aggregate demand

One characteristic of automatic fiscal policy is that it

requires no legislative action by Congress to be made effective.

If $1,000 is invested at 3 percent per year for 10 years, the investment grows to $1,343.92. This means that the present value of $1,343.92 at an interest rate of 3 percent 10 years from now is

$1000

A government incurs a budget deficit when

) taxes are less than government outlays

Which of the following policies shifts the AD curve the farthest leftward?

a decrease in government expenditure of $10 billion

The largest item of government outlays is ________.

transfer payments

In 2007, France's government had revenue of $1.287 trillion while expenditures totaled $1.356 trillion. GDP was $2.56 trillion. In 2007, the government budget balance was ________ and government debt ________.

-$0.69 billion; increased

Suppose that the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the inflation rate is 4 percent. In this case, the real after-tax interest rate is equal to

2.0 percent

The use of the U.S. federal budget to help stabilize the economy grew in reaction to the ________ and is known as ________.

Great Depression of the 1930s; fiscal policy

In the short run, an increase in government expenditure will I. shift the aggregate demand curve rightward. II. increase real GDP. III. increase the government expenditure multiplier. IV. increase the tax multiplier

I and II

Once supply side effects are taken into account, tax cuts for labor income can change I. the supply of labor. II. potential GDP.

I and II

Which branches of the government play a role in the enacting of the federal budget? I. the President. II. the House of Representatives. III. the Senate.

I, II, and III

The government receives tax revenues from several sources. Rank the following sources from largest to the smallest. I. corporate income taxes II. personal income taxes III. Social Security taxes

II, III, I

If the government wants to engage in fiscal policy to increase real GDP, it could

If the government wants to engage in fiscal policy to increase real GDP, it could

The largest component of the fiscal imbalance is

Medicare

Which of the following relationships is CORRECT?

actual budget deficit = structural deficit + cyclical deficit

Suppose the economy is at a short-run equilibrium with real GDP greater than potential GDP. Which of the following fiscal policies would decrease real GDP and the price level?

an increase in taxes

The supply side effects of a cut in tax rates include ________ in the supply of labor and ________ in the supply of loanable funds.

an increase; an increase

Tax revenues

are fixed over time

In order for the United States to have a surplus of exports over imports to repay its international debt, the United States would need to

decrease consumption and increase saving.

Suppose real GDP exceeds potential GDP. If the government decreases its expenditures on goods and services, then real GDP ________ and the price level ________.

decreases; falls

An income tax ________ potential GDP by shifting the ________ curve ________.

decreases; labor supply; leftward

If the government runs a surplus, the total amount of government debt is

decreasing

In the above figure, which fiscal policy could help move the economy to potential GDP?

decreasing government expenditure

An increase in taxes on labor income shifts the labor supply curve ________ and the ________.

leftward; after-tax wage rate falls

The largest source of government revenues is ________.

personal income taxes

Which of the following is NOT a government outlay?

purchases of foreign bonds

The actual budget deficit is equal to the

structural deficit plus the cyclical deficit

The federal government debt is equal to the

sum of past budget deficits minus the sum of past budget surpluses.

The sum of past budget deficits minus the sum of past budget surpluses refers to

the national debt.

Generational accounting does NOT investigate issues involving

the ownership of corporate stock

Fiscal policy involves

the use of tax and spending policies by the government.

The use of fiscal policy is limited because

time lags associated with fiscal policy may cause the policy to take effect too late to solve the problem it was supposed to address.

Social Security benefits and expenditures on Medicare and Medicaid are classified as

transfer payments.

In the above figure, if the economy initially is at point A and government expenditure increases, in the short run the economy will move to point

B

Looking at the supply-side effects on aggregate supply shows that a tax hike on labor income

Both answers A and B are correct.

An example of a discretionary fiscal policy is when

Congress passes a law that raises marginal tax rates

The budget process includes the

President proposing the budget and the Congress passing the budget.

According to the Laffer Curve, when tax rates are low, there is ________relationship between them and tax revenue.

a positive

In October 2008, President Bush enacted the Alternative Minimum Tax Relief Act of 2008, which resulted in lower taxes on labor income. According the supply-side view, this would result in

a rightward shift in the supply of labor curve

Fiscal policy attempts to achieve all of the following objectives EXCEPT ________.

a stable money supply

Deliberate changes in government expenditures and taxes to influence GDP

are forms of discretionary fiscal policy

A fiscal action that is triggered by the state of the economy is called

automatic fiscal policy.

Taxes and government expenditures that change in response to changes in the level of economic activity, without need for additional government action, are examples of

automatic fiscal policy.

"More than 9,000 laid-off Nevada workers will qualify for a second 13-week round of extended unemployment benefits, under federal legislation signed by President Bush. [The] workers exhausted their first 13 weeks of extended benefits and will now be eligible for the new benefits, which pay an average of $293 a week." www.mercurynews.com 11/24/2008 Unemployment benefits are considered part of ________ fiscal policy. The extension of benefits would ________ fiscal policy.

automatic; be discretionary

The figure above shows tax revenues and government expenditures in the economy of Meadowlake. Potential GDP is $16 trillion. If real GDP is $16 trillion, then the government has a ________.

balanced budget

Economic data for a mythical economy in the years 2012-2016 are summarized in the figure above. Assume that the spending formulas and tax schedules are identical for all years. When the economy is at full employment, the government has a

balanced budget.

If taxes exactly equaled government outlays the

budget deficit would be zero

European Economic Recovery Plan" "The European Commission urged EU governments to jointly combat the economic slowdown with 200 billion euros ($256 billion) in spending and tax cuts to boost growth and consumer and business confidence." The plan "...would see the 27 EU governments spend 1.5 percent of the bloc's gross domestic product to halt the slowdown that has already pushed some European nations into recession." www.iht.com, 11/26/2008 The plan is expected to

shift the AD curve rightward and increase real GDP.

An increase in taxes on interest income ________ supply of loanable funds curve and ________ the demand for loanable funds curve.

shifts; does not shift

In the above figure, if actual GDP = $17 trillion, there is a budget ________ equal to ________.

surplus; $0.2 trillion

If a tax cut increases people's labor supply, then

tax cuts increase potential GDP.

The Laffer curve is the relationship between

tax rates and tax revenue.

A budget surplus occurs when government

tax revenues exceeds outlays

In 2013, the U.S. government budget had a deficit. By definition, it must have been the case that

tax revenues were less than government outlays

When the economy grows, ________ increase because real GDP ________.

tax revenues; increases

The difference between the before-tax and after-tax rates is referred to as the

tax wedge.

The structural deficit is the deficit

that would occur at full employment

Which of the following government bodies does NOT participate directly in formulating U.S. fiscal policy?

the Federal Reserve Board