Macro

In preparing their estimates of the stimulus​ package's effect on​ GDP, Obama administration economists estimated a government purchases multiplier of 1.57. This indicates that a​ $1 billion increase in government purchases would increase equilibrium real GDP by

$1.57 billion.

In the graph to the​ right, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could Congress and the president use to move the economy to point C​?

. sell Treasury bills

Does government spending ever reduce private​ spending?

. ​Yes, due to crowding out.

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

An increase in government expenditures

Which of these is an example of an automatic stabilizer?

An unemployment benefit program

Which of these statements about the federal debt is correct?

At some point, the government may have to raise taxes or cut spending to pay interest on the debt.

According to the graph, if the solid line represents the GDP without policy and the dotted line includes policy, which side shows an ill-timed stabilization policy?

B side B shows an ill-timed stabilization policy. A stabilization policy should smooth the GDP and keep the economy closer to the full employment level of output as shown in graph A. The policy implemented in Graph B makes the situation worse instead of better.

Consider the figures below. Determine which combination of fiscal policies shifted AD 1 to AD 2 in each figure and returned the economy to​ long-run macroeconomic equilibrium.

ExampleEx ​ (A): Expansionary fiscal policy. Example​ (B): Contractionary fiscal policy.

The figure to the right illustrates the dynamic AD-AS model LOADING.... Suppose the economy is in equilibrium in the first period at point​ (A). In the second​ period, the economy reaches point​ (B). We would expect the federal government to pursue what type of policy in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium​ (point C) in the second​ period?

Expansionary monetary policy If the federal​ government's policy is​ successful, what is the effect on the following macroeconomic​ indicators? Actual real​ GDP: increases Potential real​ GDP: does not change Price​ level: increases ​Unemployment: decreases

The multiplier effect is only a consideration for increases in government purchases.

False

What is the difference between federal government purchases​ (spending) and federal government​ expenditures?

Government purchases are included in government expenditures

Which type of fiscal policy would cause the move of the AD curve represented in this graph?

Higher government spending

Which of these would be a fiscal policy the government might want to use if the economy is operating at too high a level of output?

Increasing income tax rates

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

Individual income taxes and social security withholdings

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

The tax multiplier equals the change in​ ________ divided by the change in​ ________.

TAX MULTIPLIER= Change in equilibrium real GDP/ Change in Taxes

If the economy is falling below 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

Which of these statements is true about using fiscal policy to stabilize the economy?

The delay caused by the legislative process is typically longer for fiscal policy than for monetary policy.

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

The number of workers per retiree continues to decline.

When is it considered​ "good policy" for the government to run a budget​ deficit?

When borrowing is used for ​ long-lived capital goods.

Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called __________.

automatic stabilizers

If the tax multiplier is minus1.5 and a​ $200 billion tax increase is​ implemented, what is the change in​ GDP, holding all else​ constant? ​ (You may assume the price level stays​ constant.)

a​​ $300 billion decrease in GDP

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

borrow funds from savers by selling U.S. Treasury securities.

The decline in private expenditures that results from an increase in government purchases is known as

crowding out.

All the programs that Congress authorizes on an annual basis, which are not automatically funded by the prior laws passed by Congress, are called __________.

discretionary spending

The American Recovery and Reinvestment Act of 2009 is a clear example of:

expansionary fiscal policy. This legislation involved increases in government spending and tax cuts both designed to increase aggregate demand. A contractionary fiscal policy would be designed to reduce aggregate demand and would involve increasing taxes and reducing government spending. An automatic stabilizer does not require explicit action from policymakers.

Changes in the federal tax rate or changes in government spending designed to achieve some macroeconomic policy objective are known as:

fiscal policy.

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.hi

When the economy is in a recession, the government can:

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

Budget deficits automatically __________ during recessions and __________ during expansions.

increase, decrease

The cyclically adjusted budget deficit:

is measured as if the economy were at potential real GDP.

We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier.

smaller

When the tax rate increases, the size of the multiplier effect:

decreases.

An increase in individual income taxes​ ________ disposable​ income, which​ ________ consumption spending.

decreases; decreases

The largest and fastest growing category of federal expenditures is __________.

transfer payments

What is the difference between federal government purchases​ (spending) and federal government​ expenditures?

Government purchases are included in government expenditures.