Chapter 28 : Fiscal Policy

classified as government purchases of goods and services.

Government spending to pay salaries to soldiers is:

implicit liabilities will increase.

If the average retirement age decreases:

WORK IT OUT///////////////// 1.) 10 2.) 5 3.) 3.33 4.) 2.5 5.) 2

a.) Suppose the government engages in increased purchases of goods and services. For each of the income groups in the table, what is the value of the multiplier—that is, what is the "bang for the buck" from each dollar the government spends on government purchases of goods and services in each income group? Round your answers to the nearest hundredth, if necessary. 1.) For $0 - $20,000: 2.) For $20,001 - $40,000: 3.) For $40,001 - $60,000: 4.) For $60,001 - $80,000: 5.) Above $80,000:

a progressive income tax

Which is an example of an automatic stabilizer?

rise, and sales tax revenues will rise.

When the economy expands, income tax receipts will:

Automatic stabilizers

_____ refer(s) to government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands.

HW Q'S//////////////////////////// personal income taxes

Which tax is the largest source of tax revenue in the United States?

Automatic stabilizers dampen the business cycle; any change in autonomous spending would result in a smaller inflationary or recessionary gap. While the effect of discretionary fiscal policy would be reduced, the need for discretionary fiscal policy would also be reduced.

7.) Most macroeconomists believe that it is a good thing that taxes act as automatic stabilizers and lower the size of the multiplier. However, a smaller multiplier means that changes in government purchases of goods and services, government transfers, or taxes necessary to close inflationary or recessionary gaps are larger. How can you explain this apparent inconsistency?

increases; decreases

An expansionary fiscal policy either _____ government spending or _____ taxes.

tends to shift the aggregate demand curve to the left, causing a reduction in the aggregate output and the aggregate price level for a given short-run aggregate supply curve.

Contractionary fiscal policy:

deficit of $1.5

If tax revenues are $2 trillion, transfers are $0.5 trillion, and government spending on goods and services is $3 trillion, then the budget balance is a _____ trillion.

be greatly diminished.

If the budget was required to be balanced each fiscal year, then the role of automatic stabilizers would:

expansionary fiscal policy. contractionary fiscal policy. a progressive tax. an implicit liability.

President Lyndon Johnson's surcharge on income taxes in 1968 is an example of:

expansionary fiscal policy.

The Investment Tax Credit of 2002 is an example of:

minus; minus

The government budget balance equals taxes _____ purchases _____ transfers.

spending on health care has risen faster than other types of spending.

The projections for future increases in Medicare and Medicaid are based on the fact that:

<<<<<<<All of the above.>>>>>>>>> The likelihood of default increases. Debt places an increased burden on the economy in the future. Deficits can lead to private investment spending being crowded out.

Why are persistent budget deficits worrisome?

A debt

_____ is the sum of money a government owes at a particular point in time.

The cyclically adjusted budget balance accounts for what the budget balance would be in terms of the total value of goods and services produced in an economy and the potential output.

Rather than simply comparing government revenues and tax receipts, analysts are sometimes interested in the "cyclically adjusted" budget balance. What does it mean to consider the cyclically adjusted budget balance?

a contractionary fiscal policy may be warranted.

Refer to Figure: Fiscal Policy Options. If the aggregate demand curve is AD'':

~ Increases. ~ Increase.

~ If the government decreases taxes, disposable income : ~ This causes total consumer spending to :

euro.

In 1999, a group of European countries adopted a common currency, the:

Lump-sum

_____taxes do NOT depend on the taxpayer's income.

decrease in taxes

All else equal, a(n) _____ will MOST likely increase the budget deficit.

a.) cut spending equal to the reduction in tax revenue b.) The negative consequences of the recession are magnified.

a.) If the government is required to balance the budget and the economy falls into a recession, which of the actions is a feasible policy response? b.) What is a likely consequence of this policy?

a.) Money that the government has promised to pay in the future. b.) Social Security

a.) In a macroeconomic context, what are implicit liabilities? b.) Which of the choices is a significant implicit liability in the United States?

the multiplier

Because of _____, an increase in government spending results in a larger increase in real GDP.

Sales Tax Increase

What is the likely cause of the decrease in real GDP, starting in the second quarter of 2014?

aggregate income is $500 billion above its potential level

If _____, expansionary fiscal policy is most likely to crowd out private spending.

decrease

The government's budget balance tends to _____ during a recession.

12

A government began the year with $10 trillion of public debt. During the year, it collected taxes of $8 trillion and spent $10 trillion on transfers and government purchases of goods and services. The public debt at the end of the year was $_____ trillion.

inflationary

In the figure, if the economy is at point B, then there is a(n) _____ gap.

increase the price level and increase output.

In the figure, if the economy is at point C, then expansionary fiscal policy will MOST likely:

lower

People with higher incomes usually have _____ marginal propensities to consume compared to people with lower incomes.

contractionary; left

Refer to Figure: Short- and Long-Run Equilibrium II. If the economy is at equilibrium at E1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

~ Correct ~ Incorrect

12.) Your study partner argues that the distinction between the government's budget deficit and debt is similar to the distinction between consumer savings and wealth. He also argues that if you have large budget deficits, you must have a large debt. In what ways is your study partner correct and in what ways is he incorrect? Your partner is _____about the similarity between the deficit-debt distinction and the savings-wealth distinction. He is ______ that large budget deficits imply large levels of debt.

Decrease taxes by $25 billion.

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $700 billion, which of the following policies would bring the economy to potential output?

No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

Do economists believe that the budget should be balanced each fiscal year?

The Federal Government ; Government Spending & Taxes

Fiscal policy is conducted by _____ and involves _____.

a.) $ 300 million what i did: add up the revenue category and then subtract the spending category b.) ???????? 4% what i did: 300 million divided by $7.3 billion *100 3. 52% what i did: (add up $3.5 billion and 300 million then divide by $7.3 billion) *100

GDP in 2010: $7.3 billion Total debt as of 2009: $3.5 billion a.) How much money (in millions) did Littleland need to borrow in 2010 to finance its government spending? $ million b.) At the end of 2010, what was Littleland's debt to GDP ratio? Give your answer to the nearest whole percentage point.

LEARNING CURVE/////////// the government's purchases of goods and services, as well as the expenditures the government makes in the form of transfer payments.

Government spending includes:

11 = ( 10 - 3 + 4 )

If income is $10 trillion, taxes are $3 trillion, and transfers are $4 trillion, then disposable income is $_____ trillion.

1 = (15 - 12 - 4)

If income is $15 trillion, disposable income is $12 trillion, and taxes are $4 trillion, then transfers are $_____ trillion.

5 = ( 25 - 22 + 2 )

If income is $25 trillion, disposable income is $22 trillion, and transfers are $2 trillion, then taxes are $_____ trillion.

rise.

Suppose that the budget deficit of a country remains level for five years. The federal debt will:

increase in government purchases

Suppose that the economy is in a recessionary gap. A $100 billion _____ is likely to increase real GDP by the LARGEST amount.

a.) experiencing an inflationary gap. b.) An increase in taxes c.) Graph : AD shifts LEFT

Suppose that the economy of Monaco is represented by the aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) curves in the accompanying graph. a.) Based on the graph, Monaco is : b.) Which of the following policies eliminate this phenomenon? c.) Suppose that the government implements the policy proposed in part b. Shift the aggregate demand curve on the graph accordingly.

have budget deficits no greater than 3% of a country's GDP.

The European "stability pact" of 1999 required that the countries that used the euro as their currency:

~ an increase in taxes ~ Graph : AD shifts RIGHT w/NEW intersection

The government is concerned about an inflationary gap. Shift the AD curve to provide a graphical representation of an inflationary gap and move the point, ESR, to the short-run equilibrium associated with the inflationary gap. ~ Which of the following policies will help to eliminate the inflationary gap?

AD shifts LEFT

The graph depicts aggregate demand (AD), short‑run aggregate supply (SRAS), and long‑run aggregate supply (LRAS). LRAS is sometimes labeled potential output.

1 / (1 - MPC).

The multiplier effect of changes in government purchases of goods and services is equal to:

less than the multiplier effect of a change in government spending.

The multiplier effect of changes in government transfers is:

Discretionary fiscal policy

_____ refer(s) to fiscal policy that is caused by the deliberate action by policy makers rather than rules.

$0 - $20,000

b.) If the government needed to close a recessionary or inflationary gap, which income group should it primarily target through fiscal policy?

a budget deficit; a budget surplus

Countercyclical policy calls for _____ during times of economic recession in order to combat unemployment and for _____ during times of economic overheating in order to combat inflation.

400 = ( 100 x 4 )

If the marginal propensity to consume is 0.75 and government spending increases by $100 billion, then real GDP will increase by $_____ billion.

Milton Friedman, mainly because of his research concerning the role of money in the economy

Which economist would most likely disagree with the policy measures suggested by Mario Draghi in the article?

United States

Which of the countries listed was closest to the middle of the pack in terms of their debt-GDP ratio?

~ $ 300,000 = ($75,000 x 4) ~ $ 225,000 = ($300,000 - $75,000) ~ a smaller eventual effect on real GDP.

~ What is the eventual effect on real GDP if the government increases its purchases of goods and services by $75,000? Assume the marginal propensity to consume (MPC) is 0.75. ~ What is the eventual effect on real GDP if the government, instead of changing its spending, increases transfers by $75,000? Assume the MPC has not changed. ~ An increase in government transfers or taxes, as opposed to an increase in government purchases of goods and services, will result in :

NEWS ANALYSIS//////////////// ~ False ~ False ~ False ~ True ~ True

According to the Washington Post article Japan Recession, Europe Stagnation Cast Pall Over Global Economic Outlook, which of the statements are true and which are false? 1.) Japan's economy met its expected growth rate of 2%. 2.) Prime Minister Abe has succeeded in reducing the level of Japan's government debt. 3.) A particular problem for Japan is the high rate of inflation. 4.) Japan's economy has been performing poorly for twenty years. 5.) Japan is the world's third largest economy.

reduce the budget deficit.

An increase in taxes MOST likely will:

a.) budget balance: $ -1.3 billion (22.9 - 24.2) b.) a budget deficit

Bahrainia is a country that has closed borders and does not import or export any goods or services; hence, they do not worry about trade with other countries. Total spending for the federal government of Bahrainia for the last fiscal year was 24.2 billion dollars. The country collected 22.9 billion dollars in taxes during this same fiscal year. Assume government transfers were zero. a.) Based on this information, what is Bahrainia's budget balance? Use the answer to the first question to answer the second question. b.) In the last fiscal year, Bahrainia was running

1.) DISCRETIONARY SPENDING : -legislators increase the generosity of unemployment benefits -a law is enacted that increases government spending on health care programs 2.) AUTOMATIC STABILIZERS : -a recession increases the number of recipients of unemployment benefits -economic growth increases personal and corporate income increasing tax payments

Categorize the scenarios as either a discretionary act or the result of automatic stabilizers. 1.) Discretionary spending 2.) Automatic stabilizers

QUIZ Q'S//////////////////////// transfer payments.

Government payments to households for which no good or service is provided in return are called:

a.) A Recessionary ; Increase $ 15 $ 20

6.) In the following case, either a recessionary or inflationary gap exists. a.) Real GDP equals $100 billion, potential output equals $160 billion, and the marginal propensity to consume is 0.75. ~ The economy faces _____ gap. To close the gap, government spending and/or transfers would need to _____. ~ Spending would need to change by $ ______billion to close the gap. ~ Transfers would need to change by $ ______billion to close the gap.

b.) An Inflationary ; Decrease ~ $ 25 ~ $ 50

6b.) Real GDP equals $250 billion, potential output equals $200 billion, and the marginal propensity to consume is 0.5. ~ The economy faces _____ gap. To close the gap, government spending and/or transfers would need to _____. ~ Spending would need to change by $ ______ billion (in absolute value) to close the gap. ~ Transfers would need to change by $ _____ billion (in absolute value) to close the gap.

Adopting a balanced-budget rule is not recommended. Balanced-budget rules prevent the government from using taxes and transfers as automatic stabilizers, since these policies tend to result in deficits and surpluses.

10.) You are an economic adviser to a candidate for national office. She asks you for a summary of the economic consequences of a balanced-budget rule for the federal government and for your recommendation on whether she should support such a rule. Which of the following responses is consistent with macroeconomic theory?

a.) Inflationary Gap b.) Contractionary ~ Increasing taxes c.) Graph : AD shifts LEFT EQ shifts to NEW intersection

2.) The accompanying diagram shows the current macroeconomic situation of the economy of Brittania, with real GDP of $50 billion. You have been hired as an economic consultant to help the economy move to potential output, which is $40 billion. a.) Is Brittania facing a recessionary or inflationary gap? b.) Which type of fiscal policy—expansionary or contractionary—would move the economy of Brittania to potential output? ~ What are some examples of such policies? Check all that apply. c.) Illustrate the macroeconomic situation in Albernia on the accompanying diagram after the successful fiscal policy has been implemented.

demand curve to the left.

Contractionary fiscal policy shifts the aggregate:

b) $400 million

Eastland's government has a total national debt of $500 million, which is financed as follows: $100 million is held by other government agencies, $200 million is held by Eastland's citizens, and $200 million is held by foreign citizens. The amount of public debt in Eastland is:.

decrease; $40 billion

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _____ government purchases of goods and services by _____.

~ increases. ~ decreases. ~ $ 2500 = ($1000 x 2.5) + 1000

~ As the marginal propensity to consume (MPC) increases, the multiplier : ~ As the marginal propensity to save (MPS) increases, the multiplier : ~ If the marginal propensity to consume is 0.60 , what is the multiplier, assuming there are no taxes or imports? Round to the tenths place. ~ Given the multiplier that you calculated, by how much will gross domestic product (GDP) increase when there is a $1,000 increase in government spending?

END OF CHAPTER//////////// a.) Recessionary Gap b.) Expansionary ~ Increasing government purchases of goods Increasing government transfers c.) graph : AD shifts RIGHT EQ shifts to NEW intersection

1.) The accompanying diagram shows the current macroeconomic situation of the economy of Albernia. You have been hired as an economic consultant to help the economy move to potential output, which is $200 billion. a.) Is Albernia facing a recessionary or inflationary gap? b.) Which type of fiscal policy would move the economy of Albernia to potential output? ~ What are some examples of such policies? Check all that apply. c.) In the accompanying diagram, shift the AD, LRAS, and/or SRAS curves and move the equilibrium point to its new position to illustrate the macroeconomic situation of Albernia after a fiscal policy has been successfully implemented.

a.) $ 217.2 BILLION b.) 1.2 % c.) ???? 650 d.) ???? 7.22 e.) The size of an economy, measured by its GDP, determines a government's ability to repay debt through taxes. The debt-GDP ratio is a more accurate reflection of how burdened a country is by debt than the dollar value of the debt. A government should keep the debt-GDP ratio under control to keep itself from being overburdened by debt.

16. Unlike households, governments are often able to sustain large debts. For example, in 2015, the U.S. government's total debt reached $18.1 trillion, approximately equal to 100.4% of GDP. At the time, according to the U.S. Treasury, the average interest rate paid by the government on its debt was 1.2%. However, running budget deficits becomes hard when very large debts are outstanding. a.) Annual interest: $ _____ billion b.) Rate of GDP growth: _____% c.) Debt increase: $ ______ billion d.) Rate of GDP growth: ______% e.) Why is the debt-GDP ratio the preferred measure of a country's debt rather than the dollar value of the debt? Why is it important for a country to keep its debt-GDP ratio under control?

c.) An Inflationary ; Decrease ~ $ 16 ~ $ 20

6c.) Real GDP equals $180 billion, potential output equals $100 billion, and the marginal propensity to consume is 0.8. ~ The economy faces _____ gap. To close the gap, government spending and/or transfers would need to _____. ~ Spending would need to change by $ ______ billion (in absolute value) to close the gap. ~ Transfers would need to change by $ _____ billion (in absolute value) to close the gap.

Y3 - Y2

Refer to Figure: Inflationary and Recessionary Gaps. Which equation measures an inflationary gap?

a.) $ 34.65 billion ($70 billion)(1.5) = $105 billion $105 - $70 billion = $35 billion b.) $ -40 billion Multiplier = -2.5 1/(1-0.6) negative because of reduced spending $16 billion x -2.5 = -$40 billion c.) MPC = 0.75 Multiplier = $280/$70 = 4 MPC = 0.75 = 1/4

a.) The Italian government decides to stimulate the economy by sending checks worth $70 billion to Italian consumers. If the government spending multiplier is 1.5 , calculate the MPC to determine the final change in Italy's real GDP due to the transfer. Please give your answer as a whole number in billions of dollars. b.) The Greek government decides to introduce new austerity measures, which reduce government direct spending by $16 billion. Greece has a marginal propensity to consume of 0.6 . What will be the final change in real GDP as a result of this decreased spending? Please give your answer as a whole number in billions of dollars. c.) The Japanese government decides to stimulate the economy by increasing direct spending by $70 billion. If the final change in real GDP is $280 billion, what is Japanese consumers' marginal propensity to consume (MPC)? Please round your answer to two decimal places.

government transfers rise.

Consumer spending will likely rise if:

5 = ( 25 - 22 + 2)

If income is $25 trillion, disposable income is $22 trillion, and transfers are $2 trillion, then taxes are $_____ trillion.

surplus of $0.5

If tax revenues are $3 trillion, transfers are $0.5 trillion, and government spending is $2 trillion, then the budget balance is a _____ trillion.

surplus of $0.5 = ( .5 + 2 - 3 )

If tax revenues are $3 trillion, transfers are $0.5 trillion, and government spending is $2 trillion, then the budget balance is a _____ trillion.

c) the amount of government debt rises

Which of the following occurs when investment is crowded out by government spending?

PRE-CLASS TUTORIAL//////////////////// b.) Extending the period in which unemployed workers can collect unemployment benefits.

Which of the following would be an example of expansionary fiscal policy?

an increase in taxes

Which would be considered contractionary fiscal policy?

an extension of unemployment insurance benefits

Which would be considered expansionary fiscal policy?

Decrease ; Increase

How do automatic stabilizers impact tax revenue and government spending during a recession? Tax revenue will ____ and government spending will ____.

smaller than

If the economy is operating well below potential output, the cyclically adjusted budget balance deficit is _____ than the actual budget balance.

c) Cyclically balanced budget

If the government of Balancia runs a deficit of $50 million per year in Year 1 and in Year 2 due to its recession, but then has a $100 million surplus in Year 3 due to strong economic recovery, Balancia is likely following which type of rule?

decrease

The government's budget balance will MOST likely _____ if the government pursues expansionary fiscal policy.

Inflationary gap : ~ Stock market boom ~ Government buys military equipment Recessionary gap : ~ Firms anticipate recession ~ Quantity of money declines, interest rates rise 1.) Contractionary ; LEFT 2.) Expansionary ; RIGHT

3.) An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs: a.) A stock market boom increases the value of stocks held by households. b.) Firms come to believe that a recession in the near future is likely. c.) Anticipating the possibility of war, the government increases its purchases of military equipment. d.) The quantity of money in the economy declines, and interest rates increase. 1.) If the economy faces an inflationary gap, then policy makers could use _____ fiscal policies to move the economy back to potential output. This will shift the aggregate demand curve to the _____. 2.) If the economy faces a recessionary gap, then policy makers could use _____ fiscal policies to move the economy back to potential output. This will shift the aggregate demand curve to the ______.

a.) Graph : AD shifts RIGHT w/NEW EQ b.) Graph : AD shifts LEFT w/NEW EQ c.) Expansionary fiscal policy can help bring output back to potential but makes the problem of inflation worse. Contractionary fiscal policy keeps prices under control but increases the recessionary gap imposed by stagflation.

4.) During a 2008 interview, then German Finance Minister Peer Steinbrueck said, "We have to watch out that in Europe and beyond, nothing like a combination of downward economic [growth] and high inflation rates emerges—something that experts call stagflation." a.) What would be the appropriate fiscal policy response to this situation if the primary concern of the government were to maintain economic growth? b.) What would be the appropriate fiscal policy response to this situation if the primary concern of the government were to maintain price stability? c.) Which of the following statements accurately summarizes the effectiveness of fiscal policies in fighting stagflation?

$9 trillion.

A government begins the year with $6 trillion of public debt. During the year, it collects taxes of $4 trillion and spends $7 trillion on transfers and government purchases of goods and services. The public debt at the end of the year would be:

Social Security

_____ in the United States is a "pay-as-you-go" system in which current workers pay payroll taxes that fund the benefits of current retirees.