Econ Chapter 18
T/F: 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
T/F: The higher the tax rate, the larger the multiplier effect.
False
T/F: The multiplier effect is only a consideration for increases in government purchases.
False
What is the difference between federal government purchases (spending) and federal government expenditures?
Government purchases are included in government expenditures.
What are the gains to be had from simplifying the tax code?
Greater clarity of the decisions made by households and firms AND Resources from the tax preparation industry freed up for other endeavors AND Increased efficiency of households and firms.
Each year that the federal government runs a deficit, the federal debt _____. Each year that the federal government runs asurplus, the federal debt _____.
Grows. Shrinks
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.
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.
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.
T/F: Few economists believe the federal government should attempt to balance its budget every year.
True
T/F: 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 the long run, increases in government purchases result in
complete crowding out.
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.
Between the beginning of 2009 and the end of 2010, real GDP ________, while employment ________.
increased by 4.0 percent; declined by 3.3 million
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'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.
According to the multiplier effect an initial increase in government purchases increases real GDP by ________ the initial increase in government purchases.
more than
Economists use the term fiscal policy to refer to changes in taxing and spending policies
only by the federal government.
The higher the tax rate, the _____ the multiplier effect.
smaller
Crowding out refers to
the decline in private expenditures that result from an increase in government purchases.
The long-run growth rate of real GDP depends primarily on
the growth in the number of hours worked AND the growth rate of labor productivity as measured by the growth in real GDP per hour worked.
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 national debt is best measured as
the total value of U.S. Treasury securities outstanding.
The goal of expansionary fiscal policy is
to increase aggregate demand.
Which of the following are categories of federal government expenditures?
transfer payments AND interest on the national debt AND grants to state and local governments
The largest and fastest-growing category of federal expenditures is
transfer payments.
Does government spending ever reduce private spending?
Yes, due to crowding out.
An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________.
contractionary; fall; fall
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
Over time, potential GDP ________, which is shown by the ________ curve shifting to the right.
increases; long-run aggregate supply
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
When is it considered "good policy" for the government to run a budget deficit?
When borrowing is used for long-lived capital goods.
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.
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.
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
