Economics - Chapter 10
If Amanda has an income of $40,000 and disposable income of $30,000, how much does she pay in taxes?
$10,000 Amanda pays $10,000 in taxes. The amount is determined by subtracting disposable income from total income.
Assume a marginal propensity to consume (MPC) of 0.5. Which discretionary fiscal policy would have a more pronounced impact on the economy?
A 900 billion dollar increase in government spending would have a more pronounced impact on the economy.
What is one of the dangers of a country having high debt as a percentage of GDP?
A country may default on the debt. This is a danger of a high debt-to-GDP ratio. Countries may not be able to pay the interest payments or meet maturity obligations.
What does it mean that the income tax is progressive?
As income increases, the income tax rate increases. A progressive tax means that as income increases, the income tax rate also increases.
Which describes the role of automatic stabilizers in the economy?
Automatic stabilizers have a similar impact as discretionary fiscal policy but occur automatically, without action by the government. Automatic stabilizers increase aggregate demand during recessions and reduce aggregate demand during expansions.
Place the fiscal policy timing lags in order from earliest to latest. Not all lags will be used.
Information lag Recognition lag Decision lag Implementation lag
Which of the situations is an example of the crowding-out effect on investment as it pertains to macroeconomics?
Jack wants to borrow money to create a cowboy-themed inflatable bounce house for kids called "Wild Wild West." However, the government is running a deficit which has increased interest rates so much that Jack can no longer afford to borrow the money.
Which of these countries has the highest public debt as a percentage of GDP?
Japan Japan's public debt as a percentage of GDP is greater than 200%.
For the U.S. government, which of the given is NOT an example of discretionary spending?
Medicare
Which statement best describes some of the components of externally held debt?
Public debt held by foreign individuals and entities.
What is a likely consequence of this policy?
The negative consequences of the recession are magnified.
What does it mean for a fiscal policy to be sustainable?
The present value of all projected future revenues must be equal to the present value of projected future spending. For a fiscal policy to be sustainable, the present value of all projected future revenues must be equal to the present value of projected future spending.
A decrease in government spending is ___ fiscal policy.
a contractionary
A decrease in transfer payments is ___ fiscal policy
a contractionary
An increase in tax rates is ___ fiscal policy
a contractionary
The state of Florida collected $300 million in tax revenue, but it had $350 million in expenditures. That $50 million difference is
a deficit. A deficit is the amount by which annual government spending exceeds tax revenues.
The crowding-out effect can be mitigated if the funds from deficit spending are used
for public investment. The crowding-out effect can be mitigated if the funds from deficit spending are used for public investments such as transportation infrastructure, education, or research.
Policymakers should focus on keeping unemployment low and providing the people with the public goods and services they want.
functional finance
This approach ignores the impact of the budget on the business cycle.
functional finance
the total accumulated amount that the government has borrowed and not yet paid back over time
government debt
In February 2009, Congress approved a $787 billion stimulus package. By March 30, 2011, $633.5 had been spent. This illustrates _____ lag.
implementation Once some new policy has become law, it often requires months of planning, budgeting, and implementation to set up a new program. This process, the implementation lag, rarely consumes less than 18 to 24 months.
Which of these is expansionary fiscal policy?
increasing unemployment compensation Increasing unemployment compensation is an expansionary fiscal policy.
The crowding-out effect
is large when the economy is close to full employment. The crowding-out effect is likely to be larger as the economy approaches full employment because there will be more demand for loanable funds as businesses look to invest and consumers look to purchase durable goods.
Which type of spending currently takes up a larger proportion of the U.S. federal budget?
mandatory spending
A decrease in the money supply is ___ fiscal policy.
not an example of
A decrease in the unemployment rate is ___ fiscal policy.
not an example of
An increase in corporate bonds purchased is ___ fiscal policy
not an example of
An increase in the money supply is ___ fiscal policy.
not an example of
Economists who favor the functional finance approach to the federal budget believe that
policymakers should work to keep the economy at full employment with stable prices. Economists who favor a functional finance approach to the federal budget believe the first priority of policymakers should be to keep the economy at full employment with stable prices. Whether the budget is in surplus or deficit is a secondary concern.
What is a surplus?
quantity supplied is greater than quantity demanded
In September 2010, the National Bureau of Economic Research announced that the recession that began in December 2007 ended in June 2009. This illustrates _____ lag.
recognition Recognition lag is the time it takes for policymakers to confirm that the economy is trending in or out of a recession. Policymakers depend on information sources such as the NBER.
Which of these will NOT help the government pay for a rising budget deficit?
rising imports Deficits must be financed in some form, whether by the government borrowing or selling assets, or paid for by a combination of rising private savings and falling investment. G − T = S − I + M − X.
Which of these will NOT help the government pay for a rising budget deficit?
rising investment Deficits must be financed in some form, whether by the government borrowing or selling assets, or paid for by a combination of rising private savings and falling investment. G − T = S − I + M − X.
An increase in spending on infrastructures should
shift the long-run aggregate supply curve to the right. An increase in infrastructure should increase productivity and therefore shift the long-run aggregate supply curve to the right.
Which of these is considered a withdrawal that reduces the flow of spending?
taxes Taxes are considered a leakage that reduces the spending multiplier.
The amount by which annual government spending exceeds tax revenue is called
the deficit. The amount by which annual government spending exceeds tax revenue is called the deficit.
Which of these is analyzed in public choice theory?
why people vote for certain politicians Public choice theory is the economic analysis of public and political decision making that looks at issues such as voting, the impact of election incentives on politicians, the influence of special interest groups, and rent-seeking behaviors.
Over the past year, Ionia's money supply decreased by $4$4 billion, $1$1 billion in bonds were sold to the public, an unused military base was sold for $2$2 billion, and the government spent $20 billion.
𝐺−𝑇=ΔM+ΔB+ΔA 𝐺−𝑇=ΔM+ΔB+ΔA= -$1 billion = −$4 billion+$1 billion+$2 billion Use this surplus and Ionia's government spending of $20 billion to determine tax revenue. 𝐺−𝑇=−$1 billion 𝑇=𝐺−−$1 billion=$20 billion−−$1 billion=$21 billion
For the U.S. government, which of the given is NOT an example of mandatory spending?
education spending
Fiscal policies that _____ allow the economy to expand without generating price pressures.
encourage investment in research and development Policies that encourage investment in research and development affect aggregate supply, so they will not generate price pressures.
A decrease in taxes is ___ fiscal policy.
an expansionary
An increase in government spending is ___ fiscal policy
an expansionary
If insisted upon, this approach would only worsen the economy during a recession.
annually balanced budget
This approach was considered conventional wisdom until the advent of the Great Depression.
annually balanced budget
when government spending and taxes are equa
balanced budget
Annually balancing the budget would
be incompatible with countercyclical policy. Annually balancing the budget would be incompatible with countercyclical policy.
The multiplier effect occurs when an initial increase (or decrease) in autonomous expenditure produces a greater increase (or decrease) in real GDP than the initial change. In which type of discretionary fiscal policy does the multiplier play a role?
both government spending changes and tax changes
when the federal government spends more than it collects in taxes in a given time period
budget deficit
when the government receives more in taxes than it spends in a given time period
budget surplus
If the government is required to balance the budget and the economy falls into a recession, which of the actions is a feasible policy response?
cut spending equal to the reduction in tax revenue
Policymakers should reduce spending and increase taxes when the economy is growing in order to prevent "overheating."
cyclically balanced budget
After the elections of 2010, the U.S. Senate remained controlled by the Democrats, but the majority of the House of Representatives became Republican. You might expect that this would increase the _____ lag associated with fiscal policy.
decision Decision lag is the time required for both houses of Congress and the administration to decide on a policy. Having different parts of the Congress controlled by different political parties (or having Congress controlled by one party while the president is of another party) usually results in decisions taking more time.
Legislators debate the appropriate course of action to address the rising unemployment rate. This debate lasts several quarters. This is a description of the _____ lag.
decision The time it takes Congress and the administration to decide on a policy once a problem is recognized is the decision lag.
President Reagan implemented a policy of supply-side economics, what did this mainly entail?
decreasing marginal tax rates Presidents Kennedy and Reagan decreased marginal tax rates. President Kennedy reduced the top marginal rate from 70% to 50%, and President Reagan reduced the top marginal rate from 50% to 28%.
If an economy has moved into an inflationary spiral, which of these fiscal policy actions might be taken?
decreasing unemployment compensation Decreasing unemployment compensation is a contractionary fiscal policy that may reduce inflation.
