Econ Ch. 16 Study Guide

Suppose that real GDP is currently ​$13.8 trillion and potential real GDP is​ $14.0 trillion, or a gap of ​$200 billion. The government purchases multiplier is 10.0​, and the tax multiplier is 9.0 Holding other factors​ constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential​ GDP? Government spending will need to be increased by ​$_________ billion. ​(Enter your response rounded to the nearest whole​ number.) Holding other factors​ constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential​ GDP? Taxes will need to be cut by ​$_______ billion

20 22

Suppose a political candidate hired you to develop two arguments in favor of a flat tax. Consider the following list of arguments about changing to a flat​ tax: A. There would be a reduction in paperwork and the compliance cost of the tax system. B. The complexities in the current tax code allow the government to pursue other policy goals. C. A change in the tax code would result in a more unequal distribution of income because the marginal tax rate on​ high-income taxpayers would be reduced. D. There are potential increases in labor​ supply, savings, and investment from a lower marginal tax rate. Which two out of the above list of arguments would you advance in favor of a flat​ tax?

A & D

What is the​ "tax wedge"?

A tax wedge is the difference between the pretax and post tax return to an economic activity. For​ example, a tax on interest income would decrease the post tax return to investment.

A political commentator​ argues: ​"Congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are​ unpopular." Briefly explain whether you agree.

Agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy.

Which of the following are categories of federal government​ expenditures?

All of the above (interest on the national debt, grants to state and local governments, transfer payments)

An editorial in the Wall Street Journal declares​ that: ​"We don't put much stock in future budget forecasts because they depend on so many​ variables." ​Source: "Fiscal​ Revelation," Wall Street Journal​, February​ 6, 2007, p. A 16. Which of the following variables would a forecast of future federal budget deficits depend​ on?

All of the above are important variables to consider. (GDP growth, wage growth, demographics, profit growth)

Consider the same list of arguments about changing to a flat tax. Which two out of the above list of arguments would you advance against a flat​ tax?

B & C

A Federal Reserve publication discusses an estimate of the tax multiplier that gives it a value of 1.2 after one year and 2.8 after two years. ​Source: Sylvain​ Leduc, "Fighting Downturns with Fiscal​ Policy," Federal Reserve Bank of San Francisco Economic Letter​, June​ 19, 2009. Why might the tax multiplier have a larger value after two years than after one​ year?

Consumers are more likely to perceive the tax change as permanent and change their spending choices.

What is a contractionary fiscal​ policy?

Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.

In what ways does the federal budget serve as an automatic stabilizer for the​ economy?

During a recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. both of these occur automatically and both effects help to stabilize aggregate demand

What is an expansionary fiscal​ policy?

Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.

A simplified tax code would reduce economic efficiency by increasing the number of decisions households and firms make solely to reduce their tax payments.

False

The higher the tax​ rate, the larger the multiplier effect.

False

What is the difference between federal purchases and federal​ expenditures?

Federal purchases require that the government receives a good or service in​ return, whereas federal expenditures include transfer payments.

What is fiscal​ policy?

Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives

Which of the following statements is most accurate regarding fiscal policy and monetary​ policy?

Fiscal policy includes changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and interest rates and is controlled by the Federal Reserve. Both policies are intended to achieve macroeconomic objectives

Which of the following best describes the difference between crowding out in the short run and in the long​ run?

In the short​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes?

In this case, Congress and the president should enact policies that increase government spending and decrease taxes

What changes should they make if they decide a contractionary fiscal policy is​ necessary?

In this, Congress and the president should enact policies that decrease government spending and increase taxes

From the discussion in this​ chapter, which source of government revenue is likely to increase the most in the​ future?

Individual income taxes.

Which of the following is not a correct comparison between a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply​ model?

None of the above are correct statements about the two models

According to a Congressional Budget Office​ report: CBO projects that the population age 65 or older will increase by 87 percent between now and​ 2037, compared with an increase of just 12 percent over that period in the number of people ages 20 to 64....CBO...estimates​ that, unless changes are made to Social​ Security, spending for the program will rise from 5.0 percent of GDP today to 6.2 percent by 2037. ​Source: Congressional Budget​ Office, The 2012​ Long-Term Budget Outlook​, June​ 2012, p. 65. Who are the baby​ boomers?

People born between World War II and 1965

What is the​ long-run effect of a permanent increase in government​ spending?

The decline in​ investment, consumption, and net exports exactly offsets the increase in government​ spending; therefore, real GDP remains unchanged.

What is the difference between the federal budget deficit and federal government​ debt?

The federal budget deficit is the year-to0year short fall in tax revenues relative to government spending (T < G + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits

Who is responsible for fiscal​ policy?

The federal government controls fiscal policy

Which of the following accurately defines the government purchases multiplier and the tax​ multiplier?

The government purchases multiplier = Δ in equilibrium real GDP/ Δ in government purchases and the Tax multiplier = Δ in equilibrium real GDP/ Δ in taxes

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending?

Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending

The largest and​ fastest-growing category of federal expenditures is

Transfer payments

Select the answer below that best corrects the following​ statement: ​"A contractionary fiscal policy involves a decrease in government purchases or a decrease in​ taxes."

a contractionary fiscal policy involves the decrease of government purchases and/or an increase in taxes in order to decrease aggregate demand

If the government cuts taxes in order to increase aggregate​ demand, the action is called

a discretionary fiscal policy

In a column in the Financial Times​, the prime minister and the finance minister of the Netherlands argue that the European​ Union, an organization of 27 countries in​ Europe, should have​ "a commissioner for budgetary​ discipline." They believe​ that: ​"The new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive​ deficits." ​Source: Mark Rutte and Jan Kees de​ Jager, "Expulsion from the Eurozone Has to Be the Final​ Penalty," Financial Times​, September​ 7, 2011. An​ "excessive" budget deficit in this context is

a relatively large budget deficit as a percentage of GDP beyond the European Union's deficit and debt rules

The federal​ government's budget surplus was​ $263.2 billion in 2000 and​ $128.2 billion in 2001. A decrease in the federal​ government's budget surplus can be the result of

all the above (a recession, a decrease in taxes, an increase in government purchases)

The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of

an automatic stabilizer

Select the answer below that best corrects the following​ statement: ​"An expansionary fiscal policy involves an increase in government purchases or an increase in​ taxes."

an expansionary fiscal policy involves the increase of government purchases and/or a decrease in taxes in order to increase aggregate demand

An article in the Economist states that the value of potential​ GDP: ​"is almost impossible to pin down in real time since the​ economy's equilibrium​ long-run stock of capital and labour are so difficult to estimate with​ precision...." ​Source: "Remembering When the Future Kept Getting​ Bigger," Economist​, May​ 24, 2012. By​ "real time," the article means

at any point in actual time

Changes in taxes and spending that happen without actions by the government are called

automatic stabilizers

By​ repercussions, Keynes means that an initial increase in autonomous expenditures will

change production by an amount greater than the initial increase in autonomous expenditures.

An attempt to reduce inflation requires​ _____________ fiscal​ policy, which causes real GDP to​ _________ and the price level to​ __________.

contractionary; fall; fall

What is meant by crowding​ out?

crowding out is a decline in private expenditures as a result of increases in government purchases

The following was written by a political​ columnist: ​"Today...the main purpose​ [of government's issuing​ bonds] is to let craven politicians launch projects they know the​ public, at the​ moment, would rather not fully finance. The tab for these projects will not come​ due, probably, until after the politicians have long since departed for greener​ (excuse the​ expression) pastures." ​Source: Paul​ Carpenter, "The Bond Issue​ Won't Be Repaid by Park​ Tolls," (Allentown,​ PA) Morning Call​, May​ 26, 2002. Borrowing is a bad idea to pay for ___________________ but a good idea to pay for ______________ .

current expenses long-lived capital goods

Use a dynamic aggregate demand and aggregate supply graph to illustrate the change in macroeconomic equilibrium from 2017 to​ 2018, assuming that the economy experiences deflation during 2018. In order for deflation to take place in​ 2018, the economy _________ also have to be experiencing a recession.

does

Does judging whether a deficit is excessive depend in part on whether the country is in a​ recession?

during a recession, the deficit is higher as tax revenue fall and spending increase making gan existing deficit even bigger

What is the difference between federal government purchases​ (spending) and federal government​ expenditures?

government purchases are included in government expenditures

What does Feldstein mean by a​ "behavioral response" to tax​ cuts? The behavioral response will be that people in

higher tax brackets will experience an increase in taxable income those will work more

Suppose that the economy is currently at potential​ GDP, and the federal budget is balanced. If the economy moves into​ recession, what will happen to the federal​ budget?

if the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease

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 reduce other types of spending to make the interest payments on the debt

Therefore, the statement above is __________.

incorrect

As a​ result, when compared to Y1​, real GDP would _______

increase

Between the beginning of 2009 and the end of​ 2010, real GDP​ ________, while employment​ ________.

increase by 4.0 percent; declined by 3.3 million

Compared to P1​, the price level would

increase if aggregate demand increase more than long-run aggregate supply

Writing in the Wall Street Journal​, Martin​ Feldstein, an economist at Harvard​ University, argues​ that: ​"behavioral responses" of taxpayers to the cuts in marginal tax rates enacted in 1986 resulted in​ "an enormous rise in the taxes​ paid, particularly by those who experienced the greatest reductions in marginal tax​ rates." ​Source: Martin​ Feldstein, "The Tax Reform Evidence from​ 1986," Wall Street Journal​, October​ 24, 2011. Cuts in marginal tax rates will

increase marginal net-of-tax income, increase the supply of labor and increase total taxes as people work longer hours

The cyclically adjusted budget deficit

is measured as if the economy were at potential real GDP

If a tax cut has​ supply-side effects, then

it will affect both aggregate demand and aggregate supply.

The federal government changes the required gasoline mileage for new cars. This is an example of

not a fiscal policy

Expansionary fiscal policy has a​ ________ multiplier effect on equilibrium real​ GDP, and contractionary fiscal policy has a​ ________ multiplier effect on equilibrium real GDP.

positive; negative

There may be some truth in the​ columnist's argument, but an economist might argue that

taxpayers in one year should not have to pay for a project that will benefit other taxpayers well into the future.

In​ 2013, Japan's government debt was approaching 250 percent of​ GDP, more than twice as high as in the United States. An article in the Economist noted that​ "the sheer size of the debt weighs ever more​ heavily." ​Source: "Don't Mention the​ Debt," Economist​, May​ 4, 2013. Government debt weighs heavily on

the Japanese economy because of the taxes required to service the debt

What is the cyclically adjusted budget deficit or​ surplus?

the cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were at potential GDP

Crowding out refers to

the decline in private expenditures that result from an increase in government purchases

If the​ short-run aggregate supply curve​ (SRAS) were a horizontal​ line, what would be the impact on the size of the government purchases and tax multipliers?

the impact of the multiplier would be larger if the SRAS curve is horizontal

A spokesperson for the California state agency in charge of the project mentioned that the Caldecott tunnel project would have a​ "ripple effect" on employment. The ripple effect meant that

the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers.

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 figure on the right refers to the dynamic​ AD-AS model. In that​ model, aggregate demand​ (AD), short-run aggregate supply​ (SRAS), and​ long-run aggregate supply​ (LRAS) all shift to the right in any given year​ (i.e., AD1 right arrow→ AD2 and LRAS1 right arrow→ LRAS2​ ). Notice that the graph only shows the shifts in aggregate demand​ (AD) and​ long-run aggregate supply​ (LRAS); for purposes of this exercise we ignore​ short-run aggregate supply. Now suppose that there is an increase in marginal tax rates on individual income that affects both aggregate demand and​ long-run aggregate supply. Compared to the dynamic changes shown in the​ graph, the result of the increase in the marginal tax rate will be that

the rightward shift in aggregate demand will be smaller and the rightward shift in​ long-run aggregate supply will be smaller.

We saw in the chapter opener that during​ 2013, Congress and President Obama were unable to reach an agreement to avoid the​ sequester, which involved a series of automatic cuts in federal government purchases. In testifying before​ Congress, then Federal Reserve Chairman Ben Bernanke said that the sequester​ "could create a significant headwind for the economic​ recovery." ​Source: Binyamin​ Appelbaum, 'Austerity Kills Government Jobs as Cuts to Budgets​ Loom," New York Times​, February​ 26, 2013. When Bernanke said​ "headwind," he meant that

the sequester could slow down the economic recovery.

It would seem that both households and businesses would benefit if the federal income tax were simpler and tax forms were easier to fill out. ​However, tax laws have become increasingly complicated because

the tax laws are used to encourage certain actives and discourage others

The Caldecott tunnel in northern California and similar construction projects elsewhere in the country would be expected to help the economy in the short​ run, because

the use of discretionary fiscal policy would create a multiplied increase in real GDP and employment.

The goal of expansionary fiscal policy is

to increase aggregate demand

Why do few economists argue that it would be a good idea to balance the federal budget every​ year?

to keep a balanced budget during a recession, taxes would have to increase and government expenditures would have to decrease, which would further reduce aggregate demand and deepen the recession

Which of the following statements regarding the 2009 stimulus package is​ true?

The largest category of expenditures was health​ care, social​ services, and​ education; and the largest category of tax cuts was individual tax cuts.

Why should the retirement of the baby boomers cause a large increase in the growth rate of spending by the federal government on Social​ Security?

With the retirement of the baby​ boomers, there will be more individuals collecting Social Security than currently.

As a result of crowding out in the short​ run, the effect on real GDP of an increase in government spending is often

less than the increase in government spending.

In The General Theory of​ Employment, Interest, and Money​, John Maynard Keynes wrote​ this: ​"If the Treasury were to fill old bottles with​ banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town​ rubbish, and leave it to private enterprise...to dig the notes up again... there need be no more unemployment​ and, with the help of the​ repercussions, the real income of the community...would probably become a good deal greater than it​ is." In this​ statement, Keynes is discussing the important macroeconomic effect called the ____________ effect.

multiplier

Difficulty in estimating the​ "long-run stock of capital and​ labour" creates difficulty in estimating the value of potential GDP in real time because

potential GDP is determined by the availability of​ resources, especially capital and labor.

Over​ time, potential GDP​ ________, which is shown by the​ ________ curve shifting to the right.

increases; long-run aggregate supply

Due to the American Recovery and Reinvestment Act of 2009long dash—the stimulus package—the effect on federal government

revenue and expenditures was highest in 2010 but both effects declined in 2011

Suppose that the tax increase only affected aggregate demand. Compared to the​ above, the effect on real GDP would be ____________ and the effect on the price level would be _____________

smaller; larger

What is it about these variables that makes future budget deficits difficult to​ predict?

the economic variables respond to economic shocks, making them less predictable

As the tax rate​ increases,

the multiplier effect decreases

An article in the Economist argued​ that: ​"heavy public debt risks more than just crowding out private investment. It​ can, in the​ extreme, bring on​ insolvency." ​Source: "Running Out of​ Road," Economist​, June​ 16, 2011. What does the article mean by​ "heavy public​ debts"?

the public debt is considered to be heavy when it as a percentage of GDP debt is rather high

Since World War​ II, the federal​ government's share of total government expenditures has been between

two-thirds and​ three-quarters.

About​ ________ of the American Recovery and Reinvestment Act stimulus package took the form of increases in government​ expenditures, and about​ ________ took the form of tax cuts.

two-thirds; one-third

Suppose that real GDP is currently ​$13.4 trillion and potential real GDP is​ $14.0 trillion, or a gap of ​$600 billion. The government purchases multiplier . is 5.0, and the tax multiplier is 4.0 Holding other factors​ constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential​ GDP? Government spending will need to be increased by ​$_______ billion. Holding other factors​ constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential​ GDP? Taxes will need to be cut by ​$_______ billion

120 billion 150 billion

What is meant by​ supply-side economics?

Supply-side economics refers to the use of taxes to increase incentives to​ work, save,​ invest, and start a business in order to increase​ long-run aggregate supply.

Few economists believe the federal government should attempt to balance its budget every year.

True

The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.

True

In​ 2009, Congress and the president enacted​ "cash for​ clunkers" legislation that paid people buying new cars up to​ $4,500 if they traded in an​ older, low​ gas-mileage car. ​Source: Justin​ Lahart, Trade-In Program Tunes Up Economic​ Engine," Wall Street Journal​, August​ 4, 2009. Was this piece of legislation an example of fiscal​ policy?

Yes, because the primary goal of the spending program was to stimulate the national economy

Congress and the president enact a temporary cut in payroll taxes. This is an example of

a discretionary fiscal policy

Some economists argue that because increases in government spending crowd out private​ spending, increased government spending will reduce the​ long-run growth rate of real GDP. a. This is most likely to happen if the private spending being crowded out is _______________ b. In terms of its effect on the​ long-run growth rate of real​ GDP, it is likely to matter more if the additional government spending involves

a. investment spending b. increased spending on highways and bridges

Suppose that real GDP is currently ​$13.7 trillion and potential real GDP is​ $14.0 trillion, or a gap of ​$300 billion. The government purchases multiplier is 3.3​, and the tax multiplier is 2.3 Holding other factors​ constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential​ GDP? Government spending will need to be increased by ​$______ billion. ​(Enter your response rounded to the nearest whole​ number.) Holding other factors​ constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential​ GDP? Taxes will need to be cut by ​$______ billion.

91 130

Which of the following is not a correct comparison between an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply​ model?

All of the above are correct statements about the two models. (If the economy is below full​ employment, expansionary fiscal policy will cause an increase in the price level in both models; In the dynamic​ model, expansionary policy would be used when demand does not grow​ sufficiently; in the basic​ model, expansionary policy would be used when demand falls; The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static.)

Suppose that at the same time Congress and the president pursue an expansionary fiscal​ policy, the Federal Reserve pursues an expansionary monetary policy. How might an expansionary monetary policy affect the extent of crowding out in the short​ run?

An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out.

Are federal purchases higher today than they were in​ 1960?

As a percentage of GDP, federal purchases have decreases since 1960

Are federal expenditures higher today than they were in​ 1960?

As a percentage of​ GDP, federal expenditures have increased since 1960.

Which can be changed more​ quickly: monetary policy or fiscal​ policy?

Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not​ increase?

Yes, because fiscal policy and monetary policy are separate things.

Use the graph to the right to answer the following​ questions: a. If the government does not take any policy​ actions, then, in​ 2017, the value of real GDP will be ​$_______ trillion and the value of the price level will be __________. ​ b. What actions can the government take to bring real GDP to its potential level in​ 2017? In order to bring real GDP to its potential level in​ 2017, the government can engage in _____________ fiscal policy by either ___________ government spending or _________ taxes. c. If the government takes no policy​ actions, the inflation rate in 2017 will be _____​%. ​(Enter your response rounded to one decimal​ place.) If the government uses fiscal policy to keep real GDP at its potential​ level, the inflation rate in 2017 will be _____​%.

a. 18.0; 117 b. expansionary; increasing; decreasing c. 2.6; 4.4

Identify each of the following​ as: ​(i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy. a. The corporate income tax rate is increased. This is _________ b. Defense spending is increased. This is ___________ c. The Federal Reserve lowers the target for the federal funds rate. This is _________ d. Families are allowed to deduct all their expenses for daycare from their federal income taxes. This is ___________ e. The individual income tax rate is decreased. This is _________

a. part of a contractionary fiscal policy b. not part of fiscal policy c. not part of fiscal policy d. not part of fiscal policy e. part of an expansionary fiscal policy

The revenue the federal government collects from the individual income tax declines during a recession. This is an example of

an automatic stabilizer

The difficulty of estimating potential GDP matters for policymakers because​ ideally, equilibrium GDP should occur

at potential GDP

To reduce a budget​ deficit,

budgetary policies such as increasing taxes and cutting expenditures can be used.

The large budget deficits of​ $1.4 trillion in fiscal year 2009 and​ $1.3 trillion in fiscal year 2010 were

caused partly by the increase in government spending including spending to bail out failed financial institutions and by the deep decline in tax revenues as incomes and profits fell.

Due to the American Recovery and Reinvestment Act of 2009​ (the stimulus​ package), from 2009 through​ 2011, the federal budget deficit was

greater than 8 percent of GDP but fell to 4 percent of GDP in 2013

The graph to the right shows a situation in which the economy was in equilibrium at potential GDP​ (at point​ A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential​ GDP?

increase government spending or decrease taxes

How might heavy public debts lead to crowding​ out? Heavy public debt will

increase interest rates and crowd out the interest sensitive spending such as​ investment, consumption and net exports and will decrease aggregate output.

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​ consumption, investment, and net exports to​ ___________.

increase; decrease

Budget deficits automatically​ __________ during recessions and​ __________ during expansions.

increase; decrease

Keynes appears unconcerned if government spending is wasteful because

it will still lead to an increase in production and employment

The federal​ government's day-to-day activities include running federal agencies like the Environmental Protection​ Agency, the​ FBI, the National Park​ Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up

less than 10 percent of federal government expenditures

Consider the following​ statement: ​"Real GDP is currently​ $17.7 trillion, and potential real GDP is​ $17.4 trillion. If Congress and the president would decrease government purchases by​ $300 billion or increase taxes by​ $300 billion, the economy could be brought to equilibrium at potential​ GDP." If government purchases were to decrease by​ $300 billion or if taxes were increased by​ $300 billion, the equilibrium level of real GDP would decrease by

more than​ $300 billion.

Briefly explain whether each of the following is an example of​ (1) a discretionary fiscal​ policy, (2) an automatic​ stabilizer, or​ (3) not a fiscal policy. The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of

not a fiscal policy

The Federal Reserve sells Treasury securities. This is an example of

not a fiscal policy

The sequester could create a headwind for the economic recovery because government spending cuts resulting from the sequester could

reduce aggregate demand.

The recessions accompanied by a financial crisis are more severe than recessions that do not involve bank crises because

severe financial crises collapse asset​ markets, lower real housing prices and cause a significant fall in GDP and employment.

In February​ 2013, the Congressional Budget Office​ (CBO) forecast that the federal budget deficit for fiscal year 2013 would be approximately​ $850 billion. In May​ 2013, the CBO revised down its forecast of the budget deficit to​ $642 billion. The CBO stated that a major reason for the downward revision was​ "factors related mainly to the strengthening​ economy." ​Source: Susan​ Davis, "CBO Drops 2013 Deficit Estimate to​ $642 Billion,"​ usatoday.com, May​ 15, 2013. a. A​ "strengthening economy" could lead to a downward revision of the projected budget deficit because as GDP​ increases, b. Suppose that Congress and the president were committed to balancing the budget each year. How does what happened during 2013 provide insight into difficulties they might run into in trying to balance the budget every year. Because government spending and tax revenues

a. tax revenues increase and government spending decreases, lowering the deficit b. change with GDP, balancing the budget annually would result in economic disruptions

The hypothetical information in the following table shows what the situation will be in 2017 if the federal government does not use fiscal​ policy: Year Potential GDP Real GDP Price Level 2016 ​$17.8 trillion ​$17.8 trillion 113.7 2017 ​$18.2 trillion ​$17.8 trillion 115.9 If Congress and the president want to keep real GDP at its potential level in​ 2017, they should use __________________________ ​, which would mean _____________________ If Congress and the president are successful in keeping real GDP at its potential level in​ 2017, state whether each of the following will be​ higher, lower, or the same as it would have been if they had taken no​ action: Real GDP will be ____________________ Potential real GDP will be ________________ The inflation rate will be ________________ The unemployment rate will be _______________

an expansionary fiscal policy increasing government spending or cutting taxes higher the same higher lower