Unit 9 Chapter 16: Fiscal Policy
Which of the following statements about the federal debt is correct? A. Interest payments are currently about 60 percent of total federal expenditures. B. If the debt becomes very large relative to the economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt. C. Given the current interest payments as a percent of total federal expenditures, there is a great need for immediate tax increases or significant cutbacks in other types of federal spending. D. The federal government is in danger of defaulting on its debt.
B. If the debt becomes very large relative to the economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt.
Which of the following are categories of federal government expenditures? A. transfer payments B. grants to state and local governments C. interest on the national debt D. All of the above.
D. All of the above.
A simplified tax code would reduce economic efficiency by increasing the number of decisions households and firms make solely to reduce their tax payments.
False
The higher the tax rate, the larger the multiplier effect.
False
In the context of what was happening in the economy in 1929, President Hoover was _________ in saying that, in 1932, nothing was more necessary than balancing the federal government's budget.
Incorrect In the context of a recession, most economists would argue that stimulating the economy to recover from the recession would be more important than balancing the budget, especially if doing so meant a contractionary policy!
What is the long-run effect of a permanent increase in government spending?
The decline in investment, consumption, and net exports exactly offsets the increase in government spending; therefore, real GDP remains unchanged.
U.S. federal government expenditures are comprised of purchases of goods and services (defense spending plus spending on all day-to-day activities), transfer payments, interest payments, and grants to state and local governments. Which of the following statements is true?
Transfer payments are the largest component of the federal budget (about 50%) followed by defense spending (about 20%), while spending on all its day-to-day activities is the smallest component (about 8%).
Few economists believe the federal government should attempt to balance its budget every year.
True
The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.
True
If the government cuts taxes in order to increase aggregate demand, the action is called
a discretionary fiscal policy.
The over-65 population is increasing so rapidly because
after WWII, there was a "baby boom," but after 1965 birthrates fell.
The increase in the number of people age 65 or older will result in _________in federal spending on Social Security and Medicare as a percentage of GDP.
an increase
The effect on the economy of tax reduction and simplification is
an increase in the quantity of real GDP supplied at every price level, and a shift in the long-run aggregate supply curve.
Changes in taxes and spending that happen without actions by the government are called
automatic stabilizers.
The large budget deficits of $1.4 trillion in fiscal year 2009 and $1.3 trillion in fiscal year 2010 were
caused partly by the increase in government spending including spending to bail out failed financial institutions and by the deep decline in tax revenues as incomes and profits fell.
During a recession, a government's budget deficit will
increase as there are more government expenditures for income support programs and less tax revenue as income falls.
Between the beginning of 2009 and the end of 2010, real GDP ________, while employment ________.
increased by 4.0 percent; declined by 3.3 million
Government debt
increases when the government runs a budget deficit, and rises during recessions and wars.
The U.S. federal government raises revenue from individual and corporate income taxes, social insurance taxes, and other sources (including excise taxes, tariffs, and payments to cut timber on federal lands). The largest share of federal revenues comes from
individual income taxes (about 44%), followed by social insurance taxes (about 35%) and corporate income taxes (about 13%).
The cyclically adjusted budget deficit
is measured as if the economy were at potential real GDP.
If a tax cut has supply-side effects, then
it will affect both aggregate demand and aggregate supply.
The federal government's day-to-day activities include running federal agencies like the Environmental Protection Agency, the FBI, the National Park Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up
less than 10 percent of federal government expenditures.
Economists use the term fiscal policy to refer to changes in taxing and spending policies
only by the federal government.
The recessions accompanied by a financial crisis are more severe than recessions that do not involve bank crises because
severe financial crises collapse asset markets, lower real housing prices and cause a significant fall in GDP and employment.
If current projections of federal spending on Social Security and Medicare are accurate, policymakers are faced with the choice of
significantly restraining spending on these programs and/or greatly increasing taxes on households and firms.
The Greek government responded to the recession by cutting its budget in contrast to the typical response, which is to
spend more. Historically high overspending had weakened its economy.
Crowding out refers to
the decline in private expenditures that result from an increase in government purchases.
The long-run growth rate of real GDP depends primarily on
the growth in the number of hours worked. and the growth rate of labor productivity as measured by the growth in real GDP per hour worked.
Economists believe that the smaller the tax wedge for any economic activity, such as working, saving, investing, or starting a business,
the more of that economic activity that will occur.
The national debt is best measured as
the total value of U.S. Treasury securities outstanding.
The goal of expansionary fiscal policy is
to increase aggregate demand.
The largest and fastest-growing category of federal expenditures is
transfer payments.
Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not increase?
Yes, because fiscal policy and monetary policy are separate things.
An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________.
contractionary; fall; fall
According to the crowding-out effect, if the federal government increases spending, the demand for money and the equilibrium interest rate will ___________, which will cause consumption, investment, and net exports to ___________.
increase; decrease
Budget deficits automatically __________ during recessions and __________ during expansions.
increase; decrease
Over time, potential GDP ________, which is shown by the ________ curve shifting to the right.
increases; long-run aggregate supply
Expansionary fiscal policy has a ________ multiplier effect on equilibrium real GDP, and contractionary fiscal policy has a ________ multiplier effect on equilibrium real GDP.
positive; negative
Since World War II, the federal government's share of total government expenditures has been between
two-thirds and three-quarters.
About ________ of the American Recovery and Reinvestment Act stimulus package took the form of increases in government expenditures, and about ________ took the form of tax cuts.
two-thirds; one-third