Chapter 16

The multiplier effect consists of:

. A series of induced increases in consumption spending that result from an initial increase in autonomous expenditures

What is the relationship between government purchases and government expenditures?

Government expenditures include government purchases.

Which of the following statements about the federal debt is correct?

If the debt becomes very large relative to the economy, then the government may have to raise taxes to high levels, or cut back on other types of spending to make the interest payments on the debt.

When the economy is in a recession, the government can:

Increase government purchases or decrease taxes in order to increase aggregate demand.

In 2010, which of the following two were the largest sources of federal government revenues?

Individual income taxes and social insurance taxes

Economists use the term fiscal policy to refer to changes in taxing and spending polices by

Only the federal government

How would you decompose the total effect of an increase in government purchases on the aggregate demand curve?

The aggregate demand curve shifts as a result of two distinct effects, twice to the right.

To obtain a more accurate measure of the effects on the economy of the government's spending and tax policies, economists prefer to look at:

The cyclically adjusted budget deficit or surplus.

Crowding out refers to:

The decline in private expenditures that result from an increase in government purchases.

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 goal of expansionary fiscal policy is

To increase aggregate demand

The largest and fastest growing category of federal expenditures is:

Transfer payments

If the federal government's expenditures are greater than its revenue there is a __________.

budget deficit

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 some consumption, investment, and net exports to ___________.

increase; decrease

Increases in government purchases and cuts in taxes have a __________ multiplier effect on equilibrium real GDP, while decreases in government purchases and increases in taxes have a __________ multiplier effect on equilibrium real GDP.

positive; negative

Fill in the blank. We would expect the tax multiplier to be __________ in absolute value than the government purchases.

smaller