2019 S EC231 Ch13 Test b

Discretionary fiscal policy is often initiated on the advice of the

Council of Economic Advisers

The group of three economists appointed by the president to provide fiscal policy recommendations is the

Council of Economic Advisers

The crowding-out effect arises when

Government borrows in the money market, thus causing an increase in interest rates

Which of the following best describes the built-in stabilizers as they function in the United States?

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

Which of the following would help a government reduce an inflationary output gap?

Raising taxes; Decreasing government spending

In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Which of the following is true?

There is a crowding-out effect of $20 billion.

Which of the following represents the most expansionary fiscal policy?

a $10 billion increase in government spending

The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand but also at the same time raising taxes to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is:

a mediocre and contradictory combination of tax and expenditure changes.

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n)

contractionary fiscal policy.

Which of the following is an example of built-in stability? As real GDP decreases, income tax revenues

decrease and transfer payments increase.

The set of fiscal policies that would be most contractionary would be a(n)

decrease in government spending and an increase in taxes

The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending will

decrease, thus partially offsetting the fiscal policy.

Discretionary fiscal policy will stabilize the economy most when

deficits are incurred during recessions and surpluses during inflations.

Fiscal policy refers to the

deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.

discresionary fiscal policy

fiscal policy that is the result of deliberate actions by policy makers rather than rules

When the Federal government uses taxation and spending actions to stimulate the economy, it is conducting

fiscal policy.

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should

increase tax rates and/or reduce government spending.

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be

increased government spending or decreased taxation, or a combination of the two actions.

The crowding-out effect of expansionary fiscal policy suggests that

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment

The crowding-out effect suggests that

increases in government spending may reduce private investment.

Discretionary fiscal policy refers to

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Expansionary fiscal policy is so named because it

is designed to expand real GDP

A tax reduction of a specific amount will be more expansionary the

larger is the economy's MPC.

A contractionary fiscal policy is shown as a

leftward shift in the economy's aggregate demand curve.

The political business cycle refers to the possibility that

politicians will manipulate the economy to enhance their chances of being reelected

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should

reduce taxes by $80 billion

A major advantage of the built-in or automatic stabilizers is that they

require no legislative action by Congress to be made effective

An expansionary fiscal policy is shown as a

rightward shift in the economy's aggregate demand curve.

As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system serves

serves as an automatic stabilizer for the economy

If the government wishes to increase the level of real GDP, it might reduce

taxes

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes

the crowding-out effect

The so-called negative taxes are better known as

transfer payments

Built-in stability means that

with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus, while a decline in income will result in a deficit or a lower budget surplus.

Which of the following fiscal policy actions is most likely to increase aggregate supply?

an increase in government spending on infrastructure that increases private sector productivity