Chapter 13: Fiscal Policy, Deficits, and Debt

_____ due to the public debt is undesirable if greater income equality is one of society's goals.

Income redistribution

Which of the following best describes the ratchet effect?

Increases in AD expand output beyond full-employment and push prices up, but declines in AD do not seem to push prices down.

With a large interest payment to service public debt, higher taxes may be required. Higher taxes may dampen incentives to bear risk, to innovate, to invest, and to work. These incentive reductions may:

Indirectly impair economic growth

To induce an increase in consumption through a tax-cut, the smaller the MPC is, the _____ the tax-cut needs to be:

Larger

A reduction in government spending, in response to demand-pull inflation, shifts the aggregate demand curve:

Leftward

When an economy's output is _____ than its potential output, the gap is known as a recessionary gap.

Less

Which are included in the definition of "public" in regards to the holders of Federal debt?

Local governments State governments

The government can ____ taxes to shift the aggregate demand curve rightward.

Lower

A decline in aggregate demand of $20 billion as a result of a decrease in government spending by $5 billion is a result of the _____ effect.

Multiplier

The _____ process magnifies the initial change in spending into successive rounds of new consumption spending.

Multiplier

The enactment of discretionary fiscal policy may be slowed because it is conducted in a ____ arena.

Political

Discretionary fiscal policy involves changes in government spending and taxes at the option of the:

President and Congress

The US _____ debt is the total accumulation of the deficits (minus the surpluses) the Federal government has incurred over time.

Public

Which of the following are fiscal tools that government may use to eliminate an inflationary GDP gap?

Raise taxes Decrease government spending A combination of both reduced government spending and higher taxes

The ____ effect for inflation occurs as an increase in the price level due to increases in aggregate demand, but when aggregate demand decreases, product prices, wage rates, and per-unit production costs are inflexible downward.

Ratchet

Expansionary fiscal policy is used in response to the economy being in what state?

Recession

Economists who believe there are many unmet social and infrastructure needs in the economy usually recommend that government spending be increased during what type of economic period?

Recessionary

Which of the following is a problem that may arise in connection with fiscal policy?

Recognition Lag

Government may choose to combine spending decreases and tax increases in order to ____ aggregate demand and curb inflation.

Reduce

When demand-pull inflation occurs, a _____ fiscal policy may help control it.

Restrictive

Other things equal, an increase in government spending will shift an economy's aggregate demand curve to the _____.

Right

An increase in taxes from $4 billion in an economy with a MPC of 0.75 will initially reduce _____ by $1 billion.

Savings

The total public debt represents the total amount of money owed by the Federal government to holders of US government ____.

Securities

If government disregards or underestimates the multiplier effect, contractionary fiscal policy could cause aggregate demand to:

Shift leftward further than potential output

A budget ____ occurs when tax revenues exceed government spending.

Surplus

When the economy faces demand-pull inflation, fiscal policy should move toward a government budget _____.

Surplus

List in order the steps for government to follow in order to correct an inflationary gap without throwing it into a recessionary gap?

Take into account the size of the inflationary GDP gap. Know that the price level is fixed and the aggregate supply curve is horizontal so the multiplier is in full effect. Calculate the effect of the multiplier. After applying the multiplier, initiate a change in government spending that accounts for the entire inflationary gap.

Government can use which of the following to reduce consumption?

Tax increases

Which of the following are tools of fiscal policy to positively stimulate the economy? A combination of both decreasing government spending and increasing taxes Tax increases Tax reductions Decreases in government spending Increases in government spending

Tax reductions increases in government spending

A budget deficit is government spending in excess of what?

Tax revenues

Historically, which of the following are reasons that a large US public debt might not threaten to bankrupt the Federal government?

Taxation Refinancing

The government can help correct a recession by implementing expansionary fiscal policy that reduces _____ to increase consumption spending and aggregate demand.

Taxes

Which of the following explains why the amount of consumption spending will rise by $5 billion, and saving by $1.67 billion, if the government cuts taxes by $6.67 billion?

The MPS is 0.25

The aggregate demand curve shifts by an amount greater than an initial change in government spending. This is caused by:

The multiplier effect

The multiplier is in full effect when which of the following is true?

The price level is fixed

True or False: The ratchet effect describes what the price level can remain stuck at its old level even when aggregate demand declines.

True

Increases in which of the following will always accompany a negative GDP gap?

Unemployment

If the economy starts out with a balanced Federal budget, a subsequent expansionary fiscal policy will create a _____.

budget deficit

Stopping inflation is a matter of _____ a rise in the price level, not trying to lower it to the previous level.

halting

To correct a ______ GDP-gap, the government would need to shift aggregate demand to the left.

inflationary

An economy's _____ output is also known as full-employment output.

potential

Disregarding the ratchet effect could cause contractionary fiscal policy to shift aggregate demand leftward to an amount below _____ output.

potential

Discretionary fiscal policy is also known as what?

Active fiscal policy

Why will an inflationary GDP gap cause further inflation?

Because input prices rise in the long run in order to meet the increase in output prices.

Policy changes that occur without congressional action are known as _____, passive, or automatic.

Built-in

Automatic changes in tax revenues over the course of the business cycle creates what?

Built-in stability

The preference for using government spending or taxation to eliminate recession or inflation depends on one's view as to whether government is:

too large or too small

A recession results in a negative GDP gap and increases in ______ will always accompany this gap.

unemployment

Government can use tax increases to reduce ____ spending.

Consumption

The multiplier process magnifies the initial change in spending through successive rounds of what?

Consumption spending

Restrictive fiscal policy is also known as _____ fiscal policy.

Contractionary

When demand-pull inflation occurs, what kind of fiscal policy may help control it?

Contractionary

When the government uses _____ fiscal policy to correct demand-pull inflation, the ratchet effect prevents the price level from returning to its former level.

Contractionary

What is another term for restrictive fiscal policy?

Contractionary fiscal policy

The ____-out effect is less likely to be a problem during a recession because investment demand is low during that period.

Crowding

If the desired initial increase in spending is $5 billion and the MPC is 0.75, then taxes must ____ by $6.67 billion.

Decrease

If the economy starts out with a balanced Federal budget, a subsequent expansionary fiscal policy will create a budget ____.

Deficit

A decrease in aggregate demand causes real GDP to _____.

Delcine

_____ fiscal policy changes do not occur automatically, but rather are made at the option of the Federal government.

Discretionary

_____ fiscal policy is also known as active fiscal policy.

Discretionary

The discretionary fiscal policy used to stimulate the economy is called ____ fiscal policy.

Expansionary

True or False: The upsloping aggregate supply curve means that leftward shifts of AD result in demand-pull inflation rather than increased output.

False

True or false: Members of the Council of Economic Advisers (CEA) are elected by voters.

False

True or false: an increase in aggregate demand along the flat portion of the short run aggregate supply curve will result in an increase in the price level without much effect on real output.

False

Discretionary _____ policy consists of deliberate changes in government spending and taxation designed to achieve full employment, control inflation, and encourage economic growth.

Fiscal

The crowding-out effect is a potential flaw or result of expansionary _____ policy.

Fiscal

The manipulation of taxes and federal spending in order to stimulate the economy or reduce inflation is known as expansionary or contractionary _____ policy.

Fiscal

The spending multiplier is in full effect with a ____ price level.

Fixed

An economy's potential output is also known as:

Full-employment output

Opponents of increased spending during recession and increased taxes in times of demand-pull inflation, argue that these policies expand or preserve the size of ____.

Government

_____ spending on public works such as dams and interstate highways requires long planning periods and even longer periods of construction.

Government

The multiplier effect causes the aggregate demand curve to shift by an amount _____ than an initial change in government spending.

Greater

A tax cut must be _____ than a proposed increase in government spending to achieve the same amount of rightward shift in the aggregate demand curve.

Higher