Chapter 13 - Fiscal Policy

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should A. encourage personal saving by increasing the interest rate on government bonds. B. decrease government expenditures. C. reduce tax rates and/or increase government spending. D. discourage private investment by increasing corporate income taxes.

C. reduce tax rates and/or increase government spending.

By how much should the government change spending in order to shift the aggregate demand curve rightward by $40 billion, given that the MPS in an economy is 0.1?

Change in GDP = Initial Change in Spending x Multiplier Multiplier = 1/MPS MPS = 1/0.1 = 10 40 billion = ? x 10 (divide by 10) $4 billion

What are two major differences between the capital goods produced by private investment and government investment?

Crowding-out can occur in the private sector if the government produces too many goods. This hurts small/private businesses, ect.

If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by A. reducing government expenditures by $12 billion. B. reducing government expenditures by $60 billion. C. increasing taxes by $15 billion. D. increasing taxes by $20 billion.

D. increasing taxes by $20 billion.

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will A. shift the AD curve to the right. B. increase the equilibrium GDP. C. not affect the AD curve. D. shift the AD curve to the left.

D. shift the AD curve to the left.

A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at...

...the highest AD line on the graph

An expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at...

...the lowest AD line on the graph

The crowding-out effect of expansionary fiscal policy suggests that A. government spending increases at the expense of private investment. B. imports replace domestic production. C. private investment increases at the expense of government spending. D. saving increases at the expense of investment.

A. government spending increases at the expense of private investment.

If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by A. increasing government spending by $4 billion. B. increasing government spending by $40 billion. C. decreasing taxes by $4 billion. D. increasing taxes by $4 billion.

A. increasing government spending by $4 billion.

The shift in the aggregate demand curve down and to the left could result from which of the following fiscal policy actions? A. a tax reduction B. a tax reduction accompanied by an even larger reduction in government spending C. a tax increase accompanied by an even larger increase in government spending D. an increase in government spending

B. a tax reduction accompanied by an even larger reduction in government spending

The amount by which government expenditures exceed revenues during a particular year is the A. public debt. B. budget deficit. C. full employment. D. GDP gap.

B. budget deficit.

A tax reduction of a specific amount will be more expansionary the A. smaller is the economy's MPC. B. larger is the economy's MPC. C. smaller is the economy's multiplier. D. less is the economy's built-in stability.

B. larger is the economy's MPC.

Discretionary fiscal policy refers to A. any change in government spending or taxes that destabilizes the economy. B. the authority that the president has to change personal income tax rates. C. intentional changes in taxes and government expenditures made by Congress to stabilize the economy. D. the changes in taxes and transfers that occur as GDP changes.

C. intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

The cyclically adjusted budget refers to A. the inflationary impact that the automatic stabilizers have in a full-employment economy. B. that portion of a full-employment GDP that is not consumed in the year it is produced. C. the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment. D. the number of workers who are underemployed when the level of unemployment is 4 to 5 percent.

C. the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment.

Which of the following represents the most contractionary fiscal policy? A. a $30 billion tax cut B. a $30 billion increase in government spending C. a $30 billion tax increase D. a $30 billion decrease in government spending.

D. a $30 billion decrease in government spending.

The U.S. public debt A. refers to the debts of all units of government—federal, state, and local. B. consists of the total debt of U.S. households, businesses, and government. C. refers to the collective amount that U.S. citizens and businesses owe to foreigners. D. consists of the historical accumulation of all past federal deficits and surpluses.

D. consists of the historical accumulation of all past federal deficits and surpluses.

Expansionary fiscal policy is so named because it A. involves an expansion of the nation's money supply. B. necessarily expands the size of government. C. is aimed at achieving greater price stability. D. is designed to expand real GDP.

D. is designed to expand real GDP.

During the second quarter of 2020, the U.S. was hit by the worst economic downturn since the Great Depression. Draw below the AD/AS graph and show in the graph how this crisis affected the economy. a. Given this change what would you suggest the government should do to bring the economy back to where it was.

Graph looks like this: X Aggregate demand looks like this: \ Aggregate demand would shift to the left The government should implement expansionary fiscal policy to revive the economy.

If the government performs expansionary fiscal policy, which curve, in the AD/AS model, shifts and in what direction?

If the government performs expansionary fiscal policy, the aggregate demand curve shifts to the right.

Does debt burden future generations? Explain your answer.

Only somewhat, because the U.S owes a substantial portion of the public debt to itself.

The government hires 2000 workers for new infrastructure projects. Over half of the newly hired construction workers, however, were employed in other sectors of the economy and quit their jobs to take this better paying opportunity. a. Expansionary fiscal policy b. Contractionary fiscal policy c. Crowding out d. Multiplier effect e. a and c only f. b and d only

probably e: expansionary fiscal policy & crowding out

The International Monetary Fund chief, Christine Lagarde, in a widely broadcasted interview on Tuesday April 2, 2019 stated that she expects the global economy to slow down this year and that the global economy is in a "delicate moment" now. In a graph below, show the AD/AS model and show how this news would affect the model. Make sure to indicate or answer all of the following: a. Indicate the level of output (GDP) and prices (PL) that will be produced before and after this news became public. b. What will be the effect on GDP from this change? c. What will be the effect on the Price Level from this change? d. What will be the effect on Unemployment from this change? e. What stage of the business cycle is described by this situation? f. If fiscal policy were the only tool you have to affect the economy, what type of fiscal policy would you implement? g. How would you implement the type of policy you answered in part f (what tool(s) would you use)? Explain how this process works for full credit. h. Suppose the GDP gap was $1 trillion. How would you answer part g now given the new information and a multiplier of five?

a.) Because consumer expectations are negative, consumption and investment will decrease, which will decrease GDP. The price level will stay the same because of sticky prices. b.) The new GDP will be found at the intersection of the price level and the new demand curve. c.) The price level will not change because prices are sticky. d.) Unemployment will increase because the GDP decreased. e.) This situation is known as a recession. f.) Expansionary fiscal policy should be implemented. g.) Expansionary fiscal policy should be used to increase government spending and/or decrease taxes, which would increase aggregate demand and increase GDP due to the multiplier effect. h.) need to find the intial change in GDP Change in GDP = Multiplier x Initial Change in Spending Initial Change in Spending = Change in GDP/Multiplier Initial Change in GDP = 1 trillion/5 Initial Change in GDP = 200 billion $200 billion