CHAPTER 28 MACRO

If the marginal propensity to save is 0.25, investment spending is $700 million, and the government increases its purchases of goods and services by $100 million, then real GDP increases by:

$400 million.

When government decreases government spending, the:

AD curve will shift to the left.

Fiscal policy is the uses of taxes, government transfers, or government purchases to shift the aggregate demand curve.

True

When faced with a recessionary gap, the government can increase taxes and cut spending to close it.

False

Suppose the MPC = 0.8 and the government cuts taxes by $40 billion. Which of the following will be the likely effect?

Real GDP will expand by $160 billion.

Expansionary fiscal policy pushes the aggregate demand curve to the right.

True

Most economists oppose an annually balanced budget because it would undermine automatic stabilizers.

True

One of the lags associated with fiscal policy is the time it takes to recognize that the economy has developed a recessionary or inflationary gap.

True

Taxes increase as GDP rises. This is an example of an automatic stabilizer.

True

If the economy were suffering from an inflationary gap, government should follow:

a contractionary policy which would shift the AD curve to the left.

An example of an automatic stabilizer that works when the economy contracts is:

a rise in government transfers, as more people receive unemployment insurance benefits.

An economy is currently in the midst of a recession. An example of a government policy aimed at moving the economy back to potential GDP is:

an increase in government spending on infrastructure improvements.

Which of the following is an expansionary fiscal policy?

an increase in unemployment benefits

Government spending and taxation rules that cause fiscal policy to be expansionary when the economy contracts and contractionary when the economy expands are known as:

automatic stabilizers.

Suppose the economy is experiencing a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

decrease taxes.

When the federal government finances a deficit, the government may:

borrow funds.

The current level of real GDP lies above potential GDP. An appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.

decrease government purchases; AD; left.

The difference between budget deficit and government debt is that:

deficit is the amount by which government spending exceeds tax revenues whereas debt is the amount the government owes.

Expansionary fiscal policy:

increases aggregate demand.

One of the shortcomings of fiscal policy is that:

it has time lags and sometimes it may end up destabilizing the economy as a result of these lags.

The government has a budget deficit if:

its total revenues are less than its total expenditures.

The national debt _______ in years in which the federal government incurs a _______ .

rises; deficit

An example of an automatic stabilizer is:

tax receipts rising when GDP rises.

The larger the amount of outstanding public debt:

the larger the fraction of the federal budget deficit that must be devoted to interest payments.

If the economy is at equilibrium below potential output:

there is a recessionary gap, and expansionary fiscal policy is appropriate.

If the economy is at equilibrium above potential output:

there is an inflationary gap, and contractionary fiscal policy is appropriate.

Most economists believe that a balanced budget would:

undermine the role of taxes and transfers as automatic stabilizers.