Econ ch16
If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06, we would expect the federal government to pursue a(n)_____fiscal policy If the government's policy is successful, what is the effect of the policy on the following macroeconomic indicators? Actual real GDP? Potential real GDP? Price level? Unemployment?
Contractionary decreases does not change decreases increases
If the federal government's expenditures are less than its revenue, there is a __________
budget surplus
One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase
current income
When the economy is in a recession, the government can
increase government purchases or decrease taxes in order to increase aggregate demand
Crowding out refers to
the decline in private expenditures that result from an increase in government purchases
Which of the following are categories of federal government expenditures
All of the above
Which of these fiscal policy actions will increase real GDP in the short run
An increase in government expenditures
Which of these is an example of an automatic stabilizer
An unemployment benefit program
Which of these statements about the federal debt is correct
At some point, the government may have to raise taxes or cut spending to pay interest on the debt
According to the graph, if the solid line represents the GDP without policy and the dotted line includes policy, which side shows an ill-timed stabilization policy
B
Consider the figures below. Determine which combination of fiscal policies shifted AD1 to AD2 in each figure and returned the economy to long-run macroeconomic equilibrium
Example (A): Expansionary fiscal policy. Example (B): Contractionary fiscal policy.
Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). We would expect the federal government to pursue what type of policy in order to move AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium (point C) in the second period If the government's policy is successful, what is the effect of the policy on the following macroeconomic indicators? Actual real GDP? Potential real GDP? Price level? Unemployment?
Expansionary fiscal policy increases does not change increases decreases
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
What is the difference between federal government purchases (spending) and federal government expenditures
Government purchases are included in government expenditures
Which type of fiscal policy would cause the move of the AD curve represented in this graph
Higher government spending
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
Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). What policy would the federal government likely pursue in order to move AD 2AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium (point C) in the second period?
Increase government spending
Which of these would be a fiscal policy the government might want to use if the economy is operating at too high a level of output
Increasing income tax rates
Which of these are the largest sources of federal government revenues
Individual income taxes and social security withholdings
Consider the figure to the right. An increase in government spending shifted the aggregate demand curve from AD1 to AD2. As a result, both price level and real GDP increased. What can be said, however, about the increase in real GDP
It increased by less than indicated by a multiplier with a constant price level.
Complete the following table for a static AD-AS model:
Recession: action decrease taxes.. result price level rise Rising Inflation: action decrease gov purchases.. result price level falls
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
Which of these statements is true about using fiscal policy to stabilize the economy
The delay caused by the legislative process is typically longer for fiscal policy than for monetary policy
Which of these is the main reason for the long-run funding problems of Social Security
The number of workers per retiree continues to decline
Countries with a higher marginal propensity to import (MPI) will have smaller multipliers than countries with a lower marginal propensity to import
True
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
If the government cuts taxes in order to increase aggregate demand, the action is called
a discretionary fiscal policy
The effect on the economy of tax reduction and simplification is
an increase in the quantity of real GDP supplied at every price level, and a shift in the long-run aggregate supply curve
Changes in taxes and spending that happen without actions by the government are called
automatic stabilizers
Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called __________
automatic stabilizers
Every time the federal government runs a budget deficit, the Treasury must
borrow funds from savers by selling U.S. Treasury securities
An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________
contractionary; fall; fall
The decline in private expenditures that results from an increase in government purchases is known as
crowding out
All the programs that Congress authorizes on an annual basis, which are not automatically funded by the prior laws passed by Congress, are called __________
discretionary spending
The tax multiplier equals the change in
equilibrium GDP divided by the change in taxes
The American Recovery and Reinvestment Act of 2009 is a clear example of
expansionary fiscal policy
Government policies that increase aggregate demand are called __________
expansionary policies
Changes in the federal tax rate or changes in government spending designed to achieve some macroeconomic policy objective are known as
fiscal policy
Budget deficits automatically __________ during recessions and __________ during expansions
increase, decrease
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
Between the beginning of 2009 and the end of 2010, real GDP ________, while employment ________
increased by 4.0 percent; declined by 3.3 million
Over time, potential GDP ________, which is shown by the ________ curve shifting to the right
increases; long-run aggregate supply
The cyclically adjusted budget deficit
is measured as if the economy were at potential real GDP
Economists use the term fiscal policy to refer to changes in taxing and spending policies
only by the federal government
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
We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier
smaller
Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge is called
supply-side economics
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 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
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.
From an understanding of the multiplier process, explain why an increase in the tax rate would decrease the size of the government purchases multiplier. The value of the government purchases multiplier would decrease because in the formula for the multiplier Similarly, explain why a decrease in the marginal propensity to import would increase the size of the government purchases multiplier. The value of the government purchases multiplier would decrease because in the formula for the multiplier the denominator is
the MPC is multiplied by (1− t) 1− [MPC×(1 −t) − MPI]
How does a budget deficit act as an automatic stabilizer and reduce the severity of a recession
-Consumers spend more than they would in the absence of social insurance programs, like unemployment. -During recessions, tax obligations fall due to falling wages and profits. -Transfer payments to households increase
Which of the following is the formula for the government purchases multiplier
1/ 1−MPC
Decreasing the tax rate decreases the value of the government purchases multiplier
False
After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy
No. The increase in defense spending after that date was designed to achieve homeland security objectives
When the tax rate increases, the size of the multiplier effect
decreases WHY? - The higher the tax rate, the smaller the amount of any increase in income that households have available to spend, which in turn reduces the size of the multiplier effect.
What are the gains to be had from simplifying the tax code
-Greater clarity of the decisions made by households and firms. -Increased efficiency of households and firms. -Resources from the tax preparation industry freed up for other endeavors
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
The higher the tax rate, the larger the multiplier effect.
False
When is it considered "good policy" for the government to run a budget deficit
When borrowing is used for long-lived capital goods
Which of the following is the formula for the tax multiplier
−MPC/ 1−MPC
The balanced budget multiplier is always equal to 1.
True
The national debt is best measured as the
total value of U.S. Treasury securities outstanding
The largest and fastest growing category of federal expenditures is __________
transfer payments
The largest and fastest-growing category of federal expenditures is
transfer payments
Which of the following formulas represents the expression for equilibrium real GDP
Y =C-(MPC)+I+G/ 1-MPC
Does government spending ever reduce private spending
Yes, due to crowding out
Increased government debt can lead to higher interest rates and, as a result, crowding out of private investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the economy?
-Debt-spending on education. -Debt-spending on research and development. -Debt-spending on highways and ports
If a tax cut has supply-side effects, then
it will affect both aggregate demand and aggregate supply.
The goal of expansionary fiscal policy is
to increase aggregate demand.