Module 9

Which is NOT a method of fiscal policy?

changes in the money supply

According to the Figure: Fiscal Policy II, suppose that this economy is in equilibrium at E1. If there is a decrease in government purchases, then:

AD1 will shift to the left, causing a decrease in the price level and a decrease in real GDP.

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $850 billion, which policy would bring the economy to potential output?

Increase taxes by $12.5 billion.

Suppose that the budget deficit of a country remains level for five years. Which is true concerning the fiscal stance of this government?

The federal debt will rise.

_(Figure: Short-Run Equilibrium) The Figure: Short-Run Equilibrium reflects a short-run inflationary gap. According to the labeling on the graph, the size of the inflationary gap is equal to:

Y1 - YP.

Scenario: Fiscal Policy Consider the economy of Arcadia. The households of Arcadia spend 75 percent of their income. There are no taxes and no foreign trade. The currency of Arcadia is called the arc. The level of potential output in Arcadia is 600 billion arcs. Reference: Ref 30-10 __(Scenario: Fiscal Policy) Refer to the information provided in the Scenario: Fiscal Policy. Suppose the actual real GDP in Arcadia is 500 billion arcs. This economy has:

a recessionary gap.

Policy makers use a contractionary fiscal policy when they want to close:

an inflationary gap.

Spending promises made by governments that are effectively a debt, despite the fact that they are not included in the usual debt statistics, are known as:

implicit liabilities.

If the marginal propensity to consume is 0.75 and transfer payments increase by $30 billion, real GDP will:

increase by less than $120 billion.

Figure: Fiscal Policy Options) According to the Figure: Fiscal Policy Options, if the aggregate demand curve is AD′, which is the most appropriate fiscal policy?

increase government spending and decrease income tax rates

An economy is in the midst of a recession. An example of a government policy aimed at moving the economy back to potential GDP is a(n):

increase in government spending on infrastructure improvements.

Which fiscal policy would make a budget surplus larger or a budget deficit smaller?

lower government transfers

Which represents the largest source of tax revenue for the U.S. federal government?

personal income taxes

If the economy is at equilibrium below potential output, there is a(n):

recessionary gap, and expansionary fiscal policy is appropriate

To close an inflationary gap by employing fiscal policy, the government could:

reduce budget allocations to interstate highway maintenance.

All are examples of fiscal policy EXCEPT:

reducing the money supply in order to raise the interest rate.

All else equal, when the unemployment rate decreases, the budget:

surplus gets larger or the budget deficit gets smaller.

(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, which measures a recessionary gap?

y2-y1