Econ 2201 Ch 13

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is: 0.8 1.25 5 4

5

In the United States in 2013, public debt accounted for about _____ of GDP. 12% 18% 72% 91%

72%

Which of the following is NOT an argument AGAINST the use of expansionary fiscal policy? Government spending may crowd out private spending. Government borrowing may crowd out private investment spending. Government borrowing may reduce the marginal propensity to consume. Government budget deficits may lead to reduced private spending.

Government borrowing may reduce the marginal propensity to consume.

(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. Which of the following would be the appropriate response on the part of the government upon viewing the state of the economy? Increase government spending to close the recessionary gap. Decrease government spending to close the recessionary gap. Lower tax rates to close the inflationary gap. Raise tax rates to close the inflationary gap.

Raise tax rates to close the inflationary gap.

Over the past few decades in the United States, large federal budget deficits most often have been caused by: decreased spending on welfare payments. excessive spending by the state governments. a depressed economy. excessive tax increases.

a depressed economy.

Which of the following fiscal policies would make a budget surplus smaller or a budget deficit larger? an increase in government purchases of goods and services lower government transfers higher taxes lower interest rates

an increase in government purchases of goods and services

What can the federal government do to finance a deficit? cut taxes increase purchases of goods and services increase transfer payments borrow funds

borrow funds

If the marginal propensity to consume is 0.75 and government purchases of goods and services decrease by $30 billion, real GDP will: increase by $30 billion. increase by $22.5 billion. decrease by $30 billion. decrease by $120 billion.

decrease by $120 billion.

When the economy is in a recession, tax receipts _____ and unemployment insurance payments _____. decrease; increase increase; increase increase; decrease decrease; decrease

decrease; increase

Contractionary fiscal policy includes: decreasing taxes. decreasing the money supply. decreasing government expenditures. increasing government expenditures.

decreasing government expenditures.

The federal budget tends to move toward _____ as the economy ____. deficit; contracts deficit; expands surplus; contracts a balanced budget; contracts

deficit; contracts

A change in taxes or a change in government transfers affects consumption through its effect on: autonomous consumption. the marginal propensity to save. disposable income. government spending.

disposable income.

Discretionary fiscal policy refers to changes in: interest rates. the money supply. government spending or taxes to close a recessionary or inflationary gap. taxes to account for externalities and control pollution.

government spending or taxes to close a recessionary or inflationary gap.

Scenario: Fiscal Policy Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. Reference: Ref 13-11 (Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. If actual output is 500 billion arcs, to restore the economy to potential output the government should _____ by 25 billion arcs. increase taxes decrease taxes increase spending decrease spending

increase spending

Suppose the marginal propensity to consume is 0.8 and the government cuts taxes by $40 billion. Real GDP will _____ by _____. increase; $200 billion decrease; $200 billion increase; $160 billion decrease; $160 billion

increase; $160 billion

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD1 to AD3 could be caused by: increased government purchases. decreased government transfers. higher tax rates. decreased government purchases.

increased government purchases.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD: a contractionary fiscal policy may be warranted. an expansionary fiscal policy may be warranted. no change in discretionary fiscal policy is warranted. the economy is in an inflationary gap.

no change in discretionary fiscal policy is warranted.

Government payments to households for which no good or service is provided in return are called: transfer payments. government purchases. consumption expenditures. investment expenditures.

transfer payments.