Chapter 16
If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06, we would expect the federal government to pursue a(n)
Contractionary Actual real GDP decreases Potential real GDP does not change Price level decreases Unemployment increases
Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). We would expect the federal government to pursue what type of policy in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period?
Expansionary Fiscal Policy Actual real GDP: increases Potential real GDP: does not change Price level: increases Unemployment: decreases
What are the gains to be had from simplifying the tax code?
Greater clarity of the decisions made by households and firms. Increased efficiency of households and firms. Resources from the tax preparation industry freed up for other endeavors.
Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge LOADING... is called
supply-side economics.
Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy.
-part of a contractionary -fiscal policy -not part of fiscal policy -not part of fiscal policy -not part of fiscal policy -part of an expansionary -fiscal policy
1.) From an understanding of the multiplier process, explain why an increase in the tax rate would decrease the size of the government purchases multiplier. 2.) The value of the government purchases multiplier would decrease because in the formula for the multiplier the denominator is
1.) the MPC is multiplied by (1-t) 2.) 1-[MPCx(1-t)-MPI]
1.) The government purchases multiplier can have a value greater than zero and less than 1 if 2.) Why does an estimate of the size of the multiplier matter in evaluating the effects of an expansionary fiscal policy?
1.) the marginal propensity to consume is negative. 2.) The larger the multiplier, the greater the effects of an expansionary fiscal policy.
Complete the following table for a static AD-AS model:
Decreases taxes - Rise Decreases gov't spending - fall
Consider the figures below. Determine which combination of fiscal policies shifted AD 1 to AD 2 in each figure and returned the economy to long-run macroeconomic equilibrium.
Example (A): Expansionary fiscal policy. Example (B): Contractionary fiscal policy.
Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). What policy would the federal government likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period?
Increase government spending
After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?
No. The increase in defense spending after that date was designed to achieve homeland security objectives.
How does a budget deficit LOADING... act as an automatic stabilizer and reduce the severity of a recession?
Transfer payments to households increase. Consumers spend more than they would in the absence of social insurance programs, like unemployment. During recessions, tax obligations fall due to falling wages and profits.
When is it considered "good policy" for the government to run a budget deficit?
When borrowing is used for long-lived capital goods.
One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase
current income
As a result of crowding out LOADING... in the short run, the effect on real GDP of an increase in government spending is often
less than the increase in government spending.
Briefly explain whether each of the following is an example of (1) a discretionary fiscal policy, (2) an automatic stabilizer, or (3) not a fiscal policy. The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of
not a fiscal policy. not a fiscal policy. an automatic stabilizer. an automatic stabilizer. not a fiscal policy. a discretionary fiscal policy.
Increased government debt can lead to higher interest rates and, as a result, crowding out of private investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the economy?
Debt-spending on research and development. Debt-spending on highways and ports. Debt-spending on education.