HW 03: Fiscal Policy

Recessions have contributed to the public debt by a) reducing national income and therefore tax revenues b) increasing real interest rates c) increasing the international value of the dollar d) increasing national saving

A) reducing national income and therefore tax revenues !!!!

discretionary fiscal policy

when the federal government takes action to stimulate the economy / control inflation >"active"

contractionary fiscal policy

1) decrease gov spending 2) increase taxes 3) battle inflation 4) budget surplus

Expansionary fiscal policy

1) increase gov spending 2) decrease taxes 3) battle recession 4) budget deficit

What combination of fiscal policy actions would most likely offset each other?

1) increase taxes & gov spending or 2) decrease taxes & gov spending

The american recovery and reinvestment act of 2009 ...

>787 billion package >tax cuts and gov spending increased

Due to automatic stabilizers, when the nation's total income rises, government transfer spending (increases/ decreases)

>>government spending decreases >>taxation increases

A major advantage of the built-in or automatic stabilizers is that they a) simultaneously stabilize the economy and reduce the absolute size of the public debt. b) automatically produce surpluses during recessions and deficits during inflations. c) require no legislative action by Congress to be made effective. d) guarantee that the federal budget will be balanced over the course of the business cycle.

C) REQUIRE NO LEGISLATIVE ACTION BY CONGRESS TO BE MADE EFFECTIVE BEEATCHES

Which would tend to reduce the crowding-out effect that occurs when the Federal government increases its borrowing to finance a deficit? a) The economy is operating at full employment b) The economy is operating at less than full employment c) The expenditures fail to contribute to the development of human capital. d) The deficit financing reduces the profit expectations of business firms

b) THE ECONOMY IS OPERATING AT LESS THAN FULL EMPLOYMENT

When government spending is increased, the amount of the increase in aggregate demand primarily depends on a) average propensity to consume b) the size of the multiplier c) income taxes d) exchange rates

b) THE SIZE OF THE MULTIPLIER !!!

The crowding-out effect suggests that a) tax increases are paid primarily out of saving and therefore are not an effective fiscal device. b) government borrowing to finance the public debt increases the real interest rate and reduces private investment. c) it is very difficult to have excessive aggregate spending in a capitalist economy. d) consumer and investment spending always vary inversely.

b) gov borrowing to finance public debt increases the real interest rate and reduces private investment

crowding out is a decrease in private investment caused by a) increased taxation by the government b) increased borrowing by the government c) increased consumer spending by households d) increased exports to buyers in other nations

b) increased BORROWING by the government ** high interest rates = decrease in private investment == when gov is borrowing lots of money

Increased government spending for investments such as highways or harbors financed by increasing the public debt would most likely a) crowd out future public investment b) reduce the economy's future productive capactiy c) complement private investment d) crowd out private investment

c) COMPLEMENT PRIVATE INVESTMENT ~now trucks can deliver packages to your factory

The built in stabilizers in the economy tend to a) fully offset irregular swings in real GDP b) magnify somewhat the irregular swings in real GDP c) dampen the irregular swings in real GDP d) overcompensate for the irregular swings in real GDP

c) DAMPEN THE IRREGULAR SWINGS IN REAL GDP **direct relationship between GDP and taxes when talking about the built in stabilizers :P

The crowding-out effect from government borrowing to finance the public debt is reduced when a) the economy is experiencing a period of high inflation. b) the economy is experiencing a period of high inflation. c) public investment complements private investment d) public investment substitutes for private investment

c) PUBLIC INVESTMENT COMPLEMENTS PRIVATE INVESTMENT ** budget deficit= recession = public investment increased ** crowding out nbd during recession

As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system a) increases crowding out in the economy b) decreases real intrest rates in the economy c) offsets the timing problem for fiscal policy d) serves as an automatic stabilizer for the economy

d) SERVES AS AN AUTOMATIC STABILIZER FOR THE ECONOMY !!!

Increases in the federal budget from 2007 to 2009 were caused a) exclusively by the loss of tax revenue due to recession b) exclusively by expansionary fiscal policy, as shown through growth in the cyclically adjusted deficit c) primarily by increased outlays to a rapidly growing number of Social Security recipients. d) primary by a combination of recession and expansionary fiscal policy

d) recession and expansionary fiscal policy !!!

The American Recovery and Reinvestment act of 2009 was implemented primarily to ... a) reduct inflationary pressure caused by oil price increases b) curb the overspending by househould that contributed to the Grate Recession c) bring the federal budget back into balance d) stimulate aggregate demand and employment

d) stimulate aggregate demand and employment !!!!! obama yay!!!

Which of the following statements is correct? a) Federal deficits were larger in the early 2000s than in the late 2000s. b) Deep tax cuts always expand tax revenues and reduce the public debt. c) The public debt has usually declined during wartime. d) There is a tendency for the public debt to grow during recessions.

d) there is tendency for public debt to grow during recessions

One advantage of automatic fiscal policy over discretionary fiscal policy is that auto fiscal policy...

does not have to wait for problems of discretionary policy!! no government needed !

Fiscal policy is enacted through changes in ... (2 things)

government spending and taxes

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 !!!!