Chapter 13 Review Questions

reference diagram: where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion, while the actual GDP is $200 billion, the actual budget deficit is

$40 billion

Which of the following statements is correct?

Built-in stability only partially offsets fluctuations in economic activity.

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

Council of Economic Advisers

Which of the following best describes the idea of a political business cycle?

Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

Reductions in federal tax rates on personal and corporate income.

The public debt is held as

Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

The amount by which government expenditures exceed revenues during a particular year is the

budget deficit

The U.S. public debt

consists of the historical accumulation of all past federal deficits and surpluses.

reference diagram: Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. Because of the ratchet effect,

contractionary fiscal policy that shifts aggregate demand to the AD1 will cause real GDP to fall below its full-employment level

Economists refer to a budget deficit that exists when the economy is achieving full employment as a

cyclically adjusted deficit

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by

decreasing taxes by $25 billion.

Countercyclical discretionary fiscal policy calls for

deficits during recessions and surpluses during periods of demand-pull inflation

Suppose the government purposely changes the economy's cyclically adjusted budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP. The government is engaging in a(n)

expansionary 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.

Contractionary fiscal policy is so named because it

is aimed at reducing aggregate demand and thus achieving price stability.

Expansionary fiscal policy is so named because it:

is designed to expand real GDP

A contractionary fiscal policy is shown as a

leftward shift in the economy's aggregate demand curve.

reference diagram: where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment and actual GDP are each $400 billion, government can balance its cyclically adjusted budget by

reducing G by $20 billion

An expansionary fiscal policy is shown as a

rightward shift in the economy's aggregate demand curve.

If the economy has a cyclically adjusted budget surplus, this means that:

tax revenues would exceed government expenditures if full employment were achieved.

The cyclically adjusted budget refers to

the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment

The cyclically adjusted budget tells us

what the size of the federal budget deficit or surplus would be if the economy was at full employment.

What 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.

reference diagram: where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP and actual GDP are each $400 billion, this economy will realize a

cyclically adjusted deficit of $20 billion

An economist who favored expanded government would recommend:

increases in government spending during recession and tax increases during inflation

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

If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by:

increasing government spending by $4 billion

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

require no legislative action by Congress to be made effective

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will:

shift the AD curve to the left

reference diagram: in which T is tax revenues and G is government expenditures. All figures are in billions. If GDP is $400,

the budget will be balanced

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.

reference diagram: Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. If the government wants to move the level of real GDP back to Y and reduce demand-pull inflation, in the presence of a ratchet effect, it should

enact a contractionary fiscal policy that will shift aggregate demand to the left, but not as far as AD1

The crowding-out effect suggests that

government borrowing to finance the public debt increases the real interest rate and reduces private investment.

reference diagram: in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit

at any level of GDP below $400

Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward

an excess of government expenditures over tax receipts

What might offset a crowding-out effect of financing a large public debt?

an increase in public investment

reference diagram: Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. If contractionary fiscal policy and accompanying multiplier effects move aggregate demand from AD2 to AD1, what will be the effect on real GDP and the price level?

Real GDP will fall to X and the price level will remain unchanged, assuming a ratchet effect occurs

If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by

increasing taxes by $20 billion

Discretionary fiscal policy refers to

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

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

If the MPS in an economy is 0.4 government could shift the aggregate demand curve leftward by $50 billion by

reducing government expenditures by $20 billion

reference diagram: where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion, while the actual GDP is $300 billion, the cyclical deficit is

$10 billion

reference diagram: where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion, while the actual GDP is $200 billion, the cyclically adjusted budget deficit is

$20 billion