Macro ECO Quiz 13 Ch 16 Fiscal Policy

The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.

What is the difference between the federal budget deficit and federal government​ debt?

transfer payments to decrease and tax revenues to increase.

When the economy is experiencing an expansion automatic stabilizers will​ cause: (regarding transfer payments and tax revenues)

A. Government purchases multiplier= change in equilibrium real GDP / change in government purchases. Tax multiplier= change in equilibrium real GDP / change in taxes

Which of the following formulas accurately defines the government purchases multiplier and the tax​ multiplier?

A shift from AD1 to AD2 and a movement to point​ B, with a higher price level and higher output.

(The Graph shows AD1 crossing SRAS 1 at Point C- on LRAS. AD1 crosses SRAS2 at Point D- not on LRAS. AD2 crosses SRAS1 at Point B- not on LRAS. AD2 crosses SRAS2 at Point A- on LRAS. Points are in diamond shape starting at the top and going clockwise- A, B, C, D) Suppose the economy is initially in​ long-run equilibrium. The government enacts a policy to decrease taxes. In the​ short-run, this expansionary fiscal policy will​ cause:

Q1: not a fiscal policy. Q2: not a fiscal policy. Q3: an automatic stabilizer. Q4: an automatic stabilizer. Q5: not a fiscal policy. Q6: a discretionary fiscal policy.

Briefly explain whether each of the following is an example of​ (1) a discretionary fiscal​ policy, (2) an automatic​ stabilizer, or​ (3) not a fiscal policy. Q1: The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of? Q2: The Federal Reserve sells Treasury securities. This is an example of? Q3: The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of? Q4: The revenue the federal government collects from the individual income tax declines during a recession. This is an example of? Q5: The federal government changes the required gasoline mileage for new cars. This is an example of? Q6: Congress and the president enact a temporary cut in payroll taxes. This is an example of?

Q1: decrease taxes; rise Q2: decrease gov. spending; fall

Complete the following table for a static​ AD-AS model: Q1: Recession Expansionary ↑Gov't spending or (decrease/increase taxes?), Real GDP and price level will (rise/fall?) Q2: Rising inflation Contractionary (decrease/increase Gov. spending?) or ↑Taxes, Real GDP and price level (rise/fall?)

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

Consider the figures below. Determine which combination of fiscal policies (expansionary and contractionary fiscal policy) shifted AD1 to AD2 in each figure and returned the economy to​ long-run macroeconomic equilibrium. (Example (A) shows AD1 shifting RIGHT to AD2 which crosses SRAS on LRAS line at Point B. Example (B) shows AD1 shifting LEFT to AD2 which crosses SRAS on LRAS line at Point B).

E. A and B only : A. increase the budget deficit and require the government to borrow additional funds ; B. cause the interest rate to​ increase, thereby, reducing private investment and crowding out the private sector.

If the government increases expenditure without raising​ taxes, this will? A. increase the budget deficit and require the government to borrow additional funds. B. cause the interest rate to​ increase, thereby, reducing private investment and crowding out the private sector. C. cause a decrease in the domestic exchange rate which will increase exports and decrease imports. D. All of the above. E. A and B only.

Q1: automatic stabilizers. Q2: C. The president and Congress reduce tax rates to increase the amount of investment spending. E. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate. F. The government provides stimulus funds to repair roads and bridges to increase spending in the economy.

Q1: Government spending and taxes that increase or decrease without any actions taken by the government are referred to as? Q2: Which of the following are examples of discretionary fiscal​ policy? ​(Check all that​ apply.) A. A state government borrows money to finance the building of a new bridge. B. Additional taxes are collected as the economy experiences an increase in income resulting from economic growth. C. The president and Congress reduce tax rates to increase the amount of investment spending. D. The government spends more on the military to provide assistance to England after a natural disaster. E. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate. F. The government provides stimulus funds to repair roads and bridges to increase spending in the economy.

Q1: In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes. Q2: In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

Q1: If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes? Q2: What changes should they make if they decide a contractionary fiscal policy is​ necessary?

Q1: An expansionary fiscal policy involves the increase of government purchases​ and/or a decrease in taxes in order to increase aggregate demand. Q2: A contractionary fiscal policy involves the decrease of government purchases​ and/or an increase in taxes in order to decrease aggregate demand.

Q1: Select the answer below that best corrects the following​ statement: ​"An expansionary fiscal policy involves an increase in government purchases or an increase in​ taxes." Q2: Select the answer below that best corrects the following​ statement: ​"A contractionary fiscal policy involves a decrease in government purchases or a decrease in​ taxes."

Q1: Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand. Q2: Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.

Q1: What is an expansionary fiscal​ policy? Q2: What is a contractionary fiscal​ policy?

Q1: Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives. Q2: The federal government controls fiscal policy.

Q1: What is fiscal​ policy? Q2: Who is responsible for fiscal​ policy?

Q1: Crowding out is a decline in private expenditures as a result of increases in government purchases. Q2: C. In the short​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

Q1: What is meant by crowding​ out? Q2: Which of the following best describes the difference between crowding out in the short run and in the long​ run? A. In the short run and the long​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. B. In the short run and the long​ run, most economists believe that an increase in government purchases will result in complete crowding out of private expenditures. C. In the short​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures. Your answer is correct. D. In the long​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the short​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

Q1: Federal purchases require that the government receives a good or service in​ return, whereas federal expenditures include transfer payments. Q2: As a percentage of​ GDP, federal purchases have decreased since 1960. Q3: As a percentage of​ GDP, federal expenditures have increased since 1960.

Q1: What is the difference between federal purchases and federal​ expenditures? Q2: Are federal purchases higher today than they were in​ 1960? Q3: Are federal expenditures higher today than they were in​ 1960?

Q1: B. A decrease in taxes. Q2: AD1 shifts RIGHTWARD to AD2. Point B crosses AD2 and AS1.

Q1: Which of the following is an example of an expansionary fiscal​ policy? A. An increase in the money supply. B. A decrease in taxes. C. An increase in investment spending. D. A decrease in government spending. Q2: Suppose the government decreases taxes. Use the aggregate demand and aggregate supply model to show the effects of the decrease in taxes on the economy. ​1.) Use the line drawing tool to show the effect of the decrease in taxes on the AD or AS curve. Properly label this line. ​2.) Use the point drawing tool to show the new ​short-run equilibrium. Label this point​ 'B'.

A shift from AD2 to AD1 and a movement to point​ D, with a lower price level and lower output.

The graph to the right illustrates the static​ AD-AS model. (The Points are in a diamond shape, top going clockwise - A, B, C, D. The Graph shows AD1 crossing SRAS1 on LRAS at Point C- on LRAS line. AD1 crossing SRAS2 at Point D- not on LRAS line. AD2 crossing SRAS1 at Point B- not on LRAS line. AD2 crossing SRAS2 at Point A- on LRAS Line). Suppose the economy is initially in​ long-run equilibrium at point A. The government decides to increase taxes. In the​ short-run, this contractionary fiscal policy will​ cause:

A. Increase government spending or decrease taxes. You draw AD2 over AD line and just label it at Point C. (This question was weird).

The graph to the right shows a situation in which the economy was in equilibrium at potential GDP​ (at point​ A) when the demand for housing sharply declined. (Graph shows AD1 and SRAS crossing at Point B, below (left of) the LRAS line. AD crosses SRAS at Point A on LRAS line). What actions can Congress and the president take to move the economy back to potential​ GDP? A. Increase government spending or decrease taxes. B. Increase the money supply. C. Decrease government spending or increase taxes. D. Both A and B. ​1.) Using the line drawing tool​, show the results of these actions on your graph. Label your new​ line(s). ​2.) Using the point drawing tool​, identify the new equilibrium point and label it C.

A. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending.

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending? A. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending. B. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to a decrease in aggregate demand and national​ income, which will lead to an increase in induced spending. C. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to a decrease in induced spending. D. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to a decrease in aggregate demand and national​ income, which will lead to a decrease in induced spending.

B. The legislative process experiences longer delays than monetary policy.

Why might cutting government spending as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing​ inflation? A. The economy may have already slowed. B. The legislative process experiences longer delays than monetary policy. C. The legislative process works quickly. D. The government has more concentrated power than the Fed.