CHAPTER 16

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Which of the following statements about the federal debt is​ correct?

If the debt becomes very large relative to the​ economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt.

What is the​ long-run effect of a permanent increase in government​ spending?

The decline in​ investment, consumption, and net exports exactly offsets the increase in government​ spending; therefore, real GDP remains unchanged.

In the long​ run, most economists agree that a permanent increase in government spending leads to

a decrease in private spending by the same amount that government spending increased.

budget deficit

a shortfall of tax revenue from government spending

budget surplus

an excess of tax revenue over government spending

The effect on the economy of tax reduction and simplification is

an increase in the quantity of real GDP supplied at every price​ level, and a shift in the​ long-run aggregate supply curve.

It is difficult for a government to run a budget surplus during a recession because

automatic stabilizers such as transfer payments increase.

Expansionary fiscal policy

can be effective in the short run.

An economic expansion tends to cause the federal budget deficit to​ ________ because tax revenues​ ________ and government spending on transfer payments​ ________.

decrease; rise; fall

True or false: The higher the tax​ rate, the larger the multiplier effect.

false

An increase in government purchases will increase aggregate demand because

government expenditures are a component of aggregate demand.

Budget deficits automatically​ __________ during recessions and​ __________ during expansions.

increase; decrease

Between the beginning of 2009 and the end of​ 2010, real GDP​ ________, while employment​ ________.

increased by 4.0​ percent; declined by 3.3 million

The multiplier effect refers to the series of

induced increases in consumption spending that result from an initial increase in autonomous expenditures

The cyclically adjusted budget deficit

is measured as if the economy were at potential real GDP.

If a tax cut has​ supply-side effects, then

it will affect both aggregate demand and aggregate supply.

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be​ ________ and real GDP to be​ ________.

lower; lower

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be​ ________ and real GDP to be​ _________.

lower; lower

Poorly timed discretionary policy can do more harm than good. Getting the timing right with fiscal policy is generally

more difficult than with monetary policy.

Expansionary fiscal policy has a​ ________ multiplier effect on equilibrium real​ GDP, and contractionary fiscal policy has a​ ________ multiplier effect on equilibrium real GDP.

positive; negative

crowding out refers to

the decline in private expenditures that result from an increase in government purchases.

The​ long-run growth rate of real GDP depends primarily on

the growth rate of labor productivity as measured by the growth in real GDP per hour worked and the growth in the number of hours worked.

Economists believe that the smaller the tax wedge for any economic​ activity, such as​ working, saving,​ investing, or starting a​ business,

the more of that economic activity will occur

The national debt is best measured as

the total value of U.S. Treasury securities outstanding.

True or false: The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.

true

true or false: Few economists believe the federal government should attempt to balance its budget every year.

true

About​ ________ of the American Recovery and Reinvestment Act stimulus package took the form of increases in government​ expenditures, and about​ ________ took the form of tax cuts.

​two-thirds; one-third


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