Macro Ch 16

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

Decreases

Government policies that increase aggregate demand are called?

Expansionary policies

Entitlements (mandatory spending)

Policies for which Congress has obligated itself to pay X level of benefits to Y number of recipients. Social Security benefits are an example. Policy set up in previous years

What are the largest sources of federal government revenues?

Individual income taxes and social security withholdings

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

Smaller Why: The entire amount of an increase in government purchases results in an increase in aggregate demand. But some portion of a decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods. The fractions of the tax cut that are saved and/or spent on imports will not increase aggregate demand.

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

An increase in government expenditures

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

An increase in government expenditures Why: An increase in government expenditures is a fiscal policy action that will increase real GDP in the short run. An increase in government expenditures will shift AD to the right and increase real GDP in the short run. An increase in the individual income tax and an increase in the Social Security tax will both decrease real GDP in the short run since they reduce the amount of disposable income available to households.

Which of these is an example of an automatic stabilizer?

An unemployment benefit program Why: An unemployment benefit program is an example of an automatic stabilizer. Automatic stabilizers are government spending and taxes that automatically increase or decrease depending on the phase of the business cycle. Unemployment benefits automatically increase during recessions and help to keep the recession's impact from being as severe as it would be without the program in place. Increasing tax rates and government spending do not happen automatically but instead require legislative action.

Which of the statements about the federal debt is correct?

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

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. Why: The correct statement about the federal debt is: "At some point, the government may have to raise taxes or cut spending to pay interest on the debt." These solutions become more likely as the debt increases. However, at the current time interest on the federal debt is only about 10 percent of total federal expenditures. The federal government is not in any danger of defaulting on its debt.

Taxes and transfers that stabilize GDP without requiring explicit actions by policy makers are called ________.

Automoatic stabalizers

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 Why: According to the graph, if the solid line represents the GDP without policy and the dotted line includes policy, 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.

All the programs that congress authorizes on an annual basis, which are not automatically funded by prior laws passed by congress are:

Discretionary spending

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

Expansionary Fiscal Policy

discretionary spending

Federal spending on programs that are controlled through the regular budget process Can increase the federal budget deficit during recessions

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

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

Increasing income tax rates

True or False: 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 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 are the main reason for the long run problems of social security?

The number of workers per retiree continues to decline

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

Transfer payments

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

borrow funds from savers by selling US Treasury securities

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 Why: 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. This category includes defense spending, the EPA, the State Department and a host of other programs. Entitlement spending, or mandatory spending, includes all spending that has been authorized by prior law. Unless Congress opts to change the law this spending must be maintained. Social Security in one example of mandatory or entitlement spending.

Tax Multiplier equals the change in

equilibrium GDP divided by the change in taxes.

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

higher government spending

The cyclically adjusted budget deficit

is measured as if the economy were at potential real GDP. Why: Economists believe this provides a more accurate measure of the efffects on the economy or the government taxation spending policies.

The national debt is best measured as the:

the total value of U.S. Treasury securities outstanding.

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

Crowding out

If the federal government expenditures are less than it's revenue, there is a ________________.

Budget surplus

Taxes and transfers payments that stabilize GDP without requiring explicit actions by policy makers are called _______.

automatic stabilizers

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

Fiscal Policy

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. Why: When using government policy to stabilize the economy, the delay caused by the legislative process is typically longer for fiscal policy than for monetary policy. Getting the timing right can be more difficult with fiscal policy than with monetary policy because fewer people are involved in making decisions about monetary policy. Fiscal policy requires agreement from the majority of the 535 members of Congress and the President. For this reason, the debate surrounding passage of fiscal stabilization policy can take a very long time. Monetary policy can be changed at any meeting of the Federal Reserve's Federal Open Market Committee and implemented immediately. Monetary policy is used much more frequently than fiscal policy during recessions.