Chapter 18 Macroeconomics

If $500,000 in new taxes is raised and spent on building a new school and $300,000 in private spending would have been spent anyway, how much is added to short-run aggregate demand? A) $500,000 B) $200,000 C) $300,000 D) $100,000

B) $200,000

Increases in government spending are NOT very effective in offsetting real shocks because they shift the: A) demand for loanable funds. B) AD curve. C) SRAS curve. D) LRAS curve.

B) AD curve.

A decrease in consumption growth will cause: A) AD, SRAS, and LRAS to shift to the left. B) LRAS to shift to the left. C) AD to shift to the left. D) SRAS to shift to the left.

C) AD to shift to the left.

When the government increases spending/cuts taxes it funds infrastructure spending and public goods.

Increases spending

When the government increases spending/cuts taxes it temporarily removes funding from the private sector.

Increases spending

Legislators increase the generosity of unemployment benefits. automatic stabilizers or discretionary spending

discretionary spending

When the government increases spending/cuts taxes it is supported by those who think the government does not spend enough.

increases spending

When the government cuts taxes/Increase spending private-sector spending will usually increase.

Cuts taxes

a. Which is the best characterization of the theory of Ricardian equivalence? A) Trade between two nations is mutually beneficial if each nation specializes in goods and services for which they have a comparative advantage. B) People change their consumption and saving decisions in response to budget deficits or surpluses. C) Fiscal policy can achieve equivalent results through changes to either taxation or government spending practices. D) Fiscal policy and monetary policy both have the potential to influence aggregate demand. b. Which is the best example of behavior predicted by the theory of Ricardian equivalence? A) An individual that increases consumption in response to a tax cut because she is able to keep a greater percentage of her income. B) An individual that increases saving in response to a tax cut in anticipation of future tax increases. C) A politician who suggests both tax cuts and increased government spending as expansionary fiscal policy. D) A nation that focuses on the production of one good while trading for other goods and services.

a. B) People change their consumption and saving decisions in response to budget deficits or surpluses. b. B) An individual that increases saving in response to a tax cut in anticipation of future tax increases.

Label each of the examples of fiscal policy lags. a. In December 2008, the Business Cycle Dating Committee of the National Bureau of EconomicResearch determined that the U.S. economy had been in recession since the fourth quarter of 2007 (when economic activity peaked). b. President George W. Bush released his tax relief agenda in February 2001. Following the debate in Congress, the Economic Growth and Tax Relief Reconciliation Act was signed into law inJune 2001. c. In September 1959, President Dwight D. Eisenhower signed the Federal Employees HealthBenefits Act, which established a voluntary health insurance plan for approximately two million employees and their dependents, with costs to be shared by the Federal Government and the employees. The Act became effective in July 1960.

a. recognition lag b. legislative lag c. implementation lag

Identify all of the statements that are examples of fiscal policy. -There is an increase in income tax rates. -The Federal Reserve purchases bonds on the open market. -The estate tax is repealed. -Government increases military spending. -Public money is used to build a high-speed train that connects Los Angeles and Las Vegas. -The Federal Reserve increases the money supply by decreasing the reserve ratio requirement. -To help domestic firms, government sets a quota on the number of goods that can be imported.

-There is an increase in income tax rates -The estate tax is repealed. -Government increases military spending. -Public money is used to build a high-speed train that connects Los Angeles and Las Vegas.

Fiscal policy is conducted by the ____1___ and involves __2____. 1) The U.S. Mint, The U.S. treasury, The federal government, and the Federal Reserve Bank. 2) Government spending and taxes, quantitative easing, open-market operations, and printing money

1) The federal government 2) Government spending and taxes.

When the economy is at full employment, the main impact of an increase in total spending is: A) an increase in the average price level. B) a decrease in the average price level. C) an increase in output. D) a decrease in output.

A) an increase in the average price level.

What types of expansionary fiscal policy actions can be offset by crowding out? A) both tax changes and government spending changes B) neither tax changes nor government spending changes C) government spending changes but not tax changes D) tax changes but not government spending changes

A) both tax changes and government spending changes

An automatic stabilizer is a: A) government program that is designed to stimulate aggregate demand during recessions without the need for specific actions by policymakers. B) discretionary action taken by policymakers to address current economic conditions. C) government program that maintains a constant level of spending regardless of economic conditions. D) type of fiscal policy tool that automatically adjusts the size of the multiplier to meet stabilization needs.

A) government program that is designed to stimulate aggregate demand during recessions without the need for specific actions by policymakers.

Adjust the graph to show how an increase of $25.8 billion dollars in the government's budget deficit affects this loanable funds market, holding all else equal. Market for Loanable FundsInterest rateQuantity of loanable funds (billions of $)DS Select the answer that describes the adjustment in the loanable funds market. A) The deficit increases national savings and shifts the supply curve to the right, decreasing the interest rate and crowding out investment spending. B) The deficit increases the demand for loanable funds and shifts the demand curve to the right, increasing the interest rate and crowding out investment spending. C) The deficit decreases national savings and shifts the supply curve to the left, increasing the interest rate and crowding out investment spending. D) The deficit decreases the demand for loanable funds and shifts the demand curve to the left, decreasing the interest rate and crowding out investment spending.

B) The deficit increases the demand for loanable funds and shifts the demand curve to the right, increasing the interest rate and crowding out investment spending.

What two opposing forces affect the degree of impact that fiscal policy has on the economy? A) business cycles and trends B) crowding out and the multiplier effect C) progressive taxes and regressive taxes D) deficits and surpluses

B) crowding out and the multiplier effect

Which is an example of countercyclical fiscal policy? A) decreasing government purchases during a recession B) decreasing taxes during a recession C) increasing government purchases during an expansion D) increasing taxes during a recession

B) decreasing taxes during a recession

Which describes the role of automatic stabilizers in the economy? A) Automatic stabilizers refer to industries that are not subject to the fluctuations of the economy, and therefore moderate the effects of recessions. Food, housing, and the military are examples of these industries, which are usually more stable than the rest of the economy. B) Automatic stabilizers are discretionary changes to taxes, government spending, and transfers that Congress makes in an attempt to improve the economy. C) Automatic stabilizers have a similar impact as discretionary fiscal policy but occur automatically, without action by the government. Automatic stabilizers increase aggregate demand during recessions and reduce aggregate demand during expansions. D) Automatic stabilizers are changes in the money supply that occur automatically when inflation or unemployment occurs.

C) Automatic stabilizers have a similar impact as discretionary fiscal policy but occur automatically, without action by the government. Automatic stabilizers increase aggregate demand during recessions and reduce aggregate demand during expansions.

Which of the statements is TRUE? A) Fiscal policy is primarily used to change the money supply. B) Fiscal policy is the best option to address unacceptably high inflation rates. C) Fiscal policy is less effective when a recession is caused by a real shock. D) Fiscal policy can effectively cause permanent shifts in short-run aggregate supply.

C) Fiscal policy is less effective when a recession is caused by a real shock.

Which best describes why the multiplier exists? A) When people see other people spending money, they know that the economy is about to improve, leading them to spend more money. B) The multiplier exists because money spent today is always more valuable than money spent in the future, due to inflation and interest rates. C) When people spend money, that money ends up in the pockets or bank accounts of other people or organizations, who then use that money in some way. D) When people see the government spending more money, they realize that the government thinks that prices are low; thus, they believe it is a good time to buy things.

C) When people spend money, that money ends up in the pockets or bank accounts of other people or organizations, who then use that money in some way.

Mistimed contractionary fiscal policy can cause: A) a real shock. B) inflation. C) a recession. D) rising interest rates.

C) a recession.

Ricardian equivalence: A) has not occurred in the United States. B) does not occur when a political administration is set to change. C) will occur less when consumers practice consumption smoothing. D) is less significant when consumers deem tax cuts or rebates as permanent.

D) is less significant when consumers deem tax cuts or rebates as permanent.

The implementation lag is likely to be: A) similar in length for both changes in government spending and changes in taxation. B) indefinitely long for both changes in government spending and changes in taxation. C) shorter for changes in government spending than for changes in taxation. D) longer for changes in government spending than for changes in taxation.

D) longer for changes in government spending than for changes in taxation.

Fiscal policy is MOST effective in keeping both inflation and real growth stable when there is a: A) shock to the LRAS curve. B) change in expected inflation that shifts the SRAS curve. C) real shock. D) shock to aggregate demand.

D) shock to aggregate demand.

When the government increases spending/cuts taxes it often results in increased paying down of private debt.

cuts taxes

The graph shows the market for loanable funds. Show the effect of an increase in government borrowing by shifting the proper curve. What is the effect of this change on the interest rate? A) It rises. B) It falls. C)It remains the same. What is the effect of this change on consumption spending? A) It rises. B) It falls. C) It remains the same. What is the effect of this change on private investment spending? A) It rises. B) It falls. C) It remains the same.

- The demand would shift to the right. -A) It rises. -B) It falls. -B) It falls.

Crowding out: A) is the decrease in private spending that occurs when government spending increases. B) occurs when people see that lower taxes today means higher taxes in the future, so they quickly spend the tax cut. C) is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations. D) is central bank policy on the monetary base, interest rates, and bank reserves that is designed to influence business fluctuations.

A) is the decrease in private spending that occurs when government spending increases.

What policy on taxes, spending, and borrowing is designed to influence business fluctuations? A) tax-and-spend policy B) fiscal policy C) monetary policy D) cycle-smoothing policy

B) fiscal policy

In working to correct a recession with fiscal policy, the government can: A) increase its expenditures and/or decrease taxes to shift the LRAS curve. B) raise its expenditures and/or lower taxes to increase aggregate demand. C) increase the money supply. D) wait for wages and prices to become more flexible.

B) raise its expenditures and/or lower taxes to increase aggregate demand.

The multiplier effect is the: A) increase in GDP from increased consumer savings and private investment. B) subsequent consumer spending that increases AD as a result of expansionary fiscal policy. C) increase in GDP from an increase in the money supply and a decrease in taxes. D) subsequent consumer spending that increases AD as a result of contractionary fiscal policy.

B) subsequent consumer spending that increases AD as a result of expansionary fiscal policy.

Which federal government policy influences business cycle fluctuations by taking action on taxes, spending, and borrowing? A) real business cycle policy B) growth policy C) fiscal policy D) monetary policy

C) fiscal policy

Given the possibilities for crowding out, expansionary fiscal policy financed through government borrowing is MOST likely to be effective when the: A) private sector is keen to spend or invest. B) public sector is reluctant to spend or invest. C) private sector is reluctant to spend or invest. D) public sector is keen to spend or invest.

C) private sector is reluctant to spend or invest.

a. In the context of budget deficits, what is crowding out? A) when a multiplier effect magnifies the effect of increases in income and decreases in consumer spending B) when government borrowing leads to higher interest rates and corresponding decreases in private investment C) when government spending encourages additional levels of consumption and investment from the private sector D) when budget surpluses cause firms to undertake increased levels of investment Which of the following is an example of crowding out? A) a firm that chooses not to borrow money to invest in new machinery because government borrowing has contributed to high interest rates B) excess tax revenue flooding the market for loanable funds, causing firms to borrow less C) when the government uses excess tax revenues to increase the productive capacity of the nation D) a consumer paying cash to buy a new TV for $1000, leading to a greater than $1000 increase in GDP

a.B) when government borrowing leads to higher interest rates and corresponding decreases in private investment b. A) a firm that chooses not to borrow money to invest in new machinery because government borrowing has contributed to high interest rates

A recession increases the number of recipients of unemployment benefits. automatic stabilizers or discretionary spending

automatic stabilizers

Economic growth increases personal and corporate income, increasing tax payments. automatic stabilizers or discretionary spending

automatic stabilizers

The government of Balearic is concerned about a recession, so it decides to implement expansionary fiscal policy. How would this policy be depicted in an AD-AS model? Expansionary fiscal policy would A) shift the LRAS curve to the left. b) shift the AD curve to the right. C) shift the AD curve to the left. D) shift the LRAS curve to the right and the AD curve to the right. E) shift the LRAS curve to the left and the AD curve to the left.

b) shift the AD curve to the right.

When the government increases spending/cuts taxes it is supported by those who think the government spends too much.

cuts taxes

A law is enacted that increases government spending on health‑care programs.automatic stabilizers or discretionary spending

discretionary spending