Chapter 21 study guide

If the marginal propensity to consume is 0.9, by how much will $100 of government spending increase GDP?

$1,000

When the Federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is:

Discretionary Fiscal Policy

A decrease in government spending and a cut in taxes would be a pair of fiscal policies that reinforce each other

False

Expansionary fiscal policy tends to lead to a smaller budget deficit

False

A Federal budget deficit exists when

Federal government spending exceeds tax revenues

Which of the following is an important real consequence of the public debt of the United States?

Its consequent higher interest rates lead to fewer incentives to bear risk and innovate

Which three U.S. presidents implemented well-known tax cuts designed to stimulate aggregate demand?

John F. Kennedy, Ronald Reagan, and George W. Bush

Which U.S. presidents reduced marginal tax rates to promote work and business risk taking?

Kennedy and Clinton

An expansionary fiscal policy can be illustrated by a

Leftward shift in the aggregate supply curve

In Year 1, the actual budget deficit was $150 billion and the cyclically-adjusted deficit was $125 billion. In Year 2, the actual budget deficit was $130 billion and the cyclically-adjusted deficit was $125 billion. It can be concluded that discretionary fiscal policy from Year 1 to Year 2 was:

More contractionary

If the government wishes to increase the level of real GDP, it might reduce

Taxes

Which would tend to reduce the crowding-out effect that occurs when the Federal government increases its borrowing to finance a deficit?

The economy is operating at less than full employment

The public debt is the:

Total of all past deficits minus all past surpluses

Legislators debate for six months on which spending programs to utilize to manipulate the business cycle. This is an example of the

decision lag.

Which are examples of automatic stabilizers?

income tax revenues and transfer payments

As GDP increases, tax revenues _____, which in turn ______ GDP growth.

increase; restrains

A change in aggregate demand due to an increase in transfer payments is equivalent in the aggregate expenditure model to:

An upward shift in the aggregate expenditures schedule

The economic burden of World War II for the United States was primarily:

Borne by the persons who lived during the war period

How is the public debt calculated?

By cumulating the annual difference between tax revenues and government spending over the years

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n)

Contractionary fiscal policy

A given reduction in government spending will dampen demand-pull inflation by a greater amount when the:

Economy's MPC is large

An increase in the public debt and its subsequent repayment will tend to

Mildly increase the income inequality in the U.S.

As the economy declines into recession, the collection of personal income tax revenues automatically falls. This relationship best describes how the progressive income tax system

Serves as an automatic stabilizer for the economy

As GDP decreases, tax revenues _____, causing a _______ to aggregate demand.

decline; stimulus

When a firm can _____ its capital equipment over a shorter period, it cuts its taxes _____.

depreciate; now

The $787 billion stimulus package passed in the United States in 2009 focused more on spending than on taxes partly because:

increased spending leads to a larger increase in GDP than the same reduction in taxes.

Which of the following policies do supply-side economists believe is the best for increasing the standard of living?

increasing investment in capital that boosts worker productivity

Which of the following measures is an example of an expansionary fiscal policy?

increasing unemployment compensation

The Laffer curve has which variables on its axes?

tax rates and tax revenue

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be

Increased government spending or decreased taxation, or a combination of the two actions

Most studies estimate the overall multiplier of the 2009 stimulus to be between:

1.5 and 2.

Fiscal policy is enacted through changes in

Taxation and government spending

State and local governments are limited in their ability to respond to recessions because of:

Constitutional and other requirements to balance their budgets

Assume that the economy is in a recession and there is a budget deficit. A strict balanced-budget amendment that would require the Federal government to balance its budget during a recession would be

Contractionary and worsen the effects of the recession

If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement:

Countercyclical fiscal policy

The Social Security Program is designed to pay

Current retirees using funds from current contributions

The intent of contractionary fiscal policy is to

Decrease aggregate demand

Which of the following is an example of built-in stability? As real GDP decreases, income tax revenues

Decrease and transfer payments increase

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

Decrease government spending and increase taxes

The effect of an increase in the government budget deficit on the equilibrium level of GDP is essentially the same as a(n):

Decrease in consumption

Actions by the Federal government that decrease the progressivity of the tax system

Decrease the effect of automatic stabilizers

The goal of expansionary fiscal policy is to rein in inflation

False

When the Federal government uses taxation and spending actions to stimulate the economy it is conducting:

Fiscal Policy

The following are important problems associated with the public debt, except:

Government borrowing to finance the debt may lead to too much private investment

The crowding-out effect arises when

Government borrows in the money market, thus causing an increase in interest rates

A Federal budget deficit is financed by the

Government issuance or sale of Treasury securities

Automatic stabilizers smooth fluctuations in the economy because they produce changes in the government's budget that:

Help offset changes in GDP

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

Increase government spending and decrease taxes

Assume the economy is at full employment but planned investment exceeds saving. Other things being equal, what fiscal policy actions would best address this problem?

Increase taxes and decrease government spending

Which combination of fiscal policy actions would most likely be offsetting?

Increase taxes and government spending

The crowding-out effect suggests that:

Increases in government spending may reduce private investment

__________ government spending, _____ transfer payments, and ____ taxes are all examples of expansionary fiscal policy.

Increasing; increasing; lowering

Which of the following illustrates the information lag?

The economy is predicted to increase at 0.1% in July, but the numbers are revised in August to reflect an actual 2% decrease.

A major concern with the Social Security trust fund is that:

The fund will be insufficient to cover obligations in one or two decades

One important reason why the United States government is not likely to go bankrupt even with a large public debt is that it has:

The power to print money to finance the debt

Which of the following serves as an automatic stabilizer in the economy?

The progressive income tax

A major reason that the public debt cannot bankrupt the Federal government is because

The public debt can be easily refinanced

When government spending is increased, the amount of the increase in aggregate demand primarily depends on:

The size of the multiplier

One timing problem with fiscal policy to counter a recession is an "operational lag" that occurs between the:

Time fiscal action is taken and the time that the action has its effect on the economy

One timing problem with fiscal policy to counter a recession is an "administrative lag" that occurs between the

Time the need for the fiscal action is recognized and the time that the action is taken

The so-called "negative taxes" are better known as

Transfer payments

Up until 2008, Social Security revenues exceeded payouts, and the excess inflow was used to buy

Treasury securities

Built-in stability refers to the fact that with a progressive tax system, net tax revenues vary directly with the level of GDP.

True

Expansionary fiscal policy during a recession means cutting taxes, increasing government spending, or taking both actions.

True

If the government wants to reduce unemployment using fiscal policy, it may do so by increasing government spending.

True

The flexibility of the price level tends to dampen the multiplier effect of fiscal policy.

True

If people expected that a tax cut was temporary, then this fiscal policy's effect on the economy will tend to be:

Weaker

An automatic stabilizer

is exemplified by a program such as unemployment compensation.

The lag between the time the need for fiscal action is recognized and the time action is taken is referred to as the

Administrative lag

The crowding-out effect works through interest rates to

Decrease the effectiveness of expansionary fiscal policy

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the:

Economy's MPS is small

_____ involves increasing government spending, increasing transfer payments, and/or decreasing taxes.

Expansionary fiscal policy

__________ government spending, _____ transfer payments, and ____ taxes are all examples of contractionary fiscal policy.

Reducing; reducing; raising

Crowding out is a decrease in private investment caused by:

An expansionary fiscal policy

Which economist promoted the idea that reducing tax rates can increase tax revenue?

Arthur Laffer

If the crowding-out effect is at its maximum strength, it follows that an increase in government spending would:

Not affect aggregate demand and GDP

If you are told that the government had an actual budget deficit of $50 billion, then you would:

Not be able to determine the direction of fiscal policy from the information given

A public debt which is owed to foreigners can be burdensome because

Payment of interest reduces the volume of goods and services available for domestic uses

The crowding-out effect from government borrowing to finance the public debt is reduced when

Public investment complements private investment

The goal of expansionary fiscal policy is to increase

Real GDP

The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n):

Recognition lag

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n)

Expansionary fiscal policy

The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending would:

Decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy

Due to automatic stabilizers, when income rises, government transfer spending

Decreases and tax revenues increase

Most of the public debt is owed to the nation's citizens and domestic institutions. This is one reason that the public debt:

Does not impose a large burden on future generations

In Year 1, the actual budget deficit was $200 billion and the cyclically-adjusted deficit was $150 billion. In Year 2, the actual budget deficit was $225 billion and the cyclically-adjusted deficit was $175 billion. It can be concluded that fiscal policy from Year 1 to Year 2 became more:

Expansionary

A decrease in taxes is one of the options that can be used to pursue a contractionary fiscal policy.

False

One of the potential consequences of the public debt is that it may

Lead to additional future taxes that reduce economic incentives

__________ marginal tax rates and _______________ are commonly used to increase aggregate supply.

Lowering; offering investment tax credits

The two reasons why bankruptcy is a false concern regarding the public debt are

Refinancing and taxation

Contractionary fiscal policy would tend to make a budget deficit become

Smaller

One timing problem with fiscal policy to counter a recession is a "recognition lag" that occurs between the

Start of the recession and the time it takes to recognize that the recession has started

The Federal budget deficit is calculated each year by:

Subtracting government spending from government revenues