chapter 16 quizzes and test

Which of the following would be considered an active fiscal policy?

A tax cut is designed to stimulate spending passed during a recession.

What is the relationship between government purchases and government expenditures?

Government expenditures include government purchases.

Which of the following is true of any permanent increase in government purchases in the long run?

In the long run, any permanent increase in government purchases must come at the expense of private expenditures.

Immigration and Customs Enforcement—make up

about 45 percent of federal government expenditures.

Which of the following fiscal policy actions will increase real GDP in the short run?

an increase in government expenditures

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?

an increase in government purchases

If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to

be below potential GDP.

Every time the federal government runs a budget deficit, the Treasury must

borrow funds from savers by selling Treasury securities.

Fiscal policy refers to

changes in federal taxes and spending that are intended to achieve macroeconomic policy objectives.

Getting the timing right can be more difficult with one of these policies. Which one?

fiscal policy

Which of the following was a period of federal budget surpluses?

from 1998 through 2001

Which of the following are categories of federal government expenditures?

grants to state and local governments transfer payments interest on the national debt (all of the above)

The majority of dollars spent by government prior to the Great Depression was spending at the ________ level. In the post World War II period, two-thirds to three quarters of all dollars spent by government in the United States are spent at the ________ level.

state and local; federal

Which of the following is a government expenditure, but is not a government purchase?

The federal government pays out an unemployment insurance claim.

Which of the following is the main reason for the long-run funding problems of Social Security?

The number of workers per retiree continues to decline.

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

a decline in investment, consumption, and net exports that exactly offsets the increase in government purchases, therefore, aggregate demand remains unchanged

If the government cuts taxes in order to raise aggregate demand in the economy, the action is called

a discretionary fiscal policy.

Which of the following is an example of automatic stablizers?

an increase in tax rates to reduce inflation

If the federal government's expenditures are greater than its revenue, there is a

budget deficit.

An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to ________ and the price level to __________.

contractionary; fall; fall

To combat a recession with discretionary fiscal policy, Congress and the president should

decrease taxes to increase consumer disposable income.

A(n) ________ in private expenditures as a result of a(n) ________ in government purchases is called crowding out.

decrease; increase

Following a decrease in government spending, as the price level falls we would expect the level of interest rates to ________ and investment to ________.

decrease; increase

Decreasing government spending ________ the price level and ________ equilibrium real GDP.

decreases; decreases

When the government takes actions to change taxes and spending, the type of policy involved is called

discretionary fiscal policy

Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________.

discretionary fiscal policy; automatic stabilizers

.Crowding out, following an increase in government spending, results from (the exchange rate is the foreign exchange price of the domestic currency)

higher interest rates and a higher exchange rate.

When the economy is in a recession, the government can

increase government purchases or decrease taxes in order to increase aggregate demand.

According to the crowding out effect, if the federal government increases spending, the demand for money and the equilibrium interest rate will ___________, which will cause some consumption, investment, and net exports to ___________.

increase; decrease

Budget deficits automatically __________ during recessions and __________ during expansions.

increase; decrease

Which of the following are the largest sources of federal government revenues?

individual income taxes and social insurance taxes

Social Security

is a system whereby current retirees are paid from taxes collected from current workers.

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.

Economists use the term fiscal policy to refer to changes in taxing and spending policies by

only the federal government.

Increases in government spending result in ________ in the short run, and permanent increases in government spending result in ________ in the long run.

partial crowding out; complete crowding out

__________ multiplier effect on equilibrium real GDP.

positive; negative

An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may

raise interest rates and reduce consumer expenditures on automobiles and new houses. make domestic businesses less competitive in international markets as the dollar appreciates in value. reduce investment in new capital. All of the above are correct.

Which of the following will reduce the inflation rate?

reducing government purchases or increasing taxes

Expansionary fiscal policy will

shift the aggregate demand curve to the right.

The problem causing most recessions is too little

spending.

If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

taxes.

Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment.

taxes; expenditures

Because they can quickly change policy in response to changing economic conditions,

the Fed plays a larger role in stabilizing the economy than the president and Congress.

Crowding out refers to

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

Crowding out will be greater

the more sensitive investment spending is to changes in the interest rate.

The goal of expansionary fiscal policy is

to increase aggregate demand.

Which of the following is the largest category of federal government expenditures?

transfer payments

The largest and fastest growing category of federal expenditures is

transfer payments.