Chapter 13: Quiz Review

Built-in, or automatic, stabilizers work by changing ______ so that GDP changes are reduced.

taxes and government payouts

Approximately what percentage of the U.S. public debt is held by foreign individuals and institutions?

33 percent.

Which of the following represents the most expansionary fiscal policy?

A $10 billion increase in government spending.

Refer to the diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at:

AD3.

The group of three economists appointed by the president to provide fiscal policy recommendations is the:

Council of Economic Advisers.

Which of the following would help a government reduce an inflationary output gap?

Decreasing government spending. Raising taxes.

What are the two ways to measure the public debt?

Its absolute dollar size and as a percentage of GDP

The ratchet effect makes anti-inflationary policy

More difficult

Which of the following best describes the built-in stabilizers as they function in the United States?

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

Suppose that a country has no public debt in year 1 but experiences a budget deficit of $30 billion in year 2, a budget deficit of $20 billion in year 3, a budget surplus of $10 billion in year 4, and a budget deficit of $2 billion in year 5. a. What is the absolute size of its public debt in year 5? b. If its real GDP in year 5 is $104 billion, what is this country's public debt as a percentage of real GDP in year 5?

Public debt is the sum of deficits and surpluses (negative deficits) over time. Since the country started year 1 with no public debt, the country's debt at the end of year 3 is $42 billion (=30+20-10+2). If real GDP in year 5 is $104 billion, this country's public debt as a percentage of real GDP in year 5 is 40.38% (= $42/104).

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with:

a contractionary fiscal policy.

An appropriate fiscal policy for severe demand-pull inflation is:

a tax rate increase.

Refer to the data for a fictional economy. The changes in the budget conditions between 1999 and 2000 best reflect:

an expansionary fiscal policy.

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with:

an expansionary fiscal policy.

Expansionary fiscal policy is so named because it:

is designed to expand real GDP.

The amount by which government expenditures exceed revenues during a particular year is the:

budget deficit.

The U.S. public debt:

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

If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by:

decreasing taxes by $25 billion.

The Council of Economic Advisers (CEA) advises the President on

economic matters, and provides recommendations for discretionary fiscal policy action.

The crowding-out effect of expansionary fiscal policy suggests that:

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

A contractionary fiscal policy is shown as a:

leftward shift in the economy's aggregate demand curve.

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:

reduce tax rates and/or increase government spending.

The crowding-out effect is the

reduction in investment spending caused by the increase in interest rates, arising from an increase in government spending.