InQuizitive Chapter 16: Fiscal Policy

Place the events in sequence to describe how crowding-out happens.Place the events in sequence to describe how crowding-out happens.

-Because of a recession, consumers have less disposable income to spend on durable goods, like cars. -A state government passes a stimulus package that sends aid to struggling car manufacturing firm in the state. -Car manufacturers use government funding, instead of their own money, to invest in improving their machinery. -Despite the increase in spending, aggregate demand has not increased as much as expected.

Suppose the government has a balanced budget and wants to increase spending without changing tax rates. The government enters the loanable funds market to borrow $150 billion for economic stimulus spending. How much money is available for private investment after this action has shifted the demand curve as shown in the figure?

250 billion dollars

If the marginal propensity to consume is 0.80, what is the total implied increase in economic spending activity from a government stimulus of $100 billion?

500 billion dollars

What are some characteristics of supply-side fiscal policy?

Correct Answer(s) -It focuses on incentives for people to work and produce. -Policy proposals are emphasized as long-run solutions to growth problems. Incorrect Answer(s) -It de-emphasizes the role of government. -It is aimed at shifting the aggregate demand curve.

Which policy tools are considered automatic stabilizers?

Correct Answer(s) -a progressive income tax structure -government unemployment benefits Incorrect Answer(s) -Social Security -economic stimulus legislation

Which of the following government actions would be considered fiscal policy decisions?

Correct Answer(s) -cutting taxes to encourage commercial activity -canceling a government-funded project because of a -lessened need for job creation Incorrect Answer(s) -the central bank acting to increase the money supply -passage of new national air quality standards -stricter enforcement of immigration law

What are the causes of rising government budget deficits when expansionary fiscal policy is used during recessions?

Correct Answer(s) -reduced economic activity, which means less tax revenue -increased government borrowing Incorrect Answer(s) -higher income tax rates -increased borrowing by private entities

What is the reasoning behind the multiplying effect of government spending?

Every dollar spent is paid to someone who will turn around and spend a portion of it.

Assume the government has established countercyclical fiscal policies to reduce the severity of its economy's business cycle fluctuations. Click on the periods during which a contractionary fiscal policy is in effect.

Far Left, Far Right, and Middle

Classify each scenario according to the type of policy lag it illustrates.

Government spending is cut by $100 billion, but inflation persists for another 12 months. (Correct label: impact lag) The economy trends downward for two months, but economists are not sure if this signals the start of a recession. (Correct label: recognition lag) Economists determine that unemployment has skyrocketed several months after it began to rise. (Correct label: recognition lag) Congress approves a $100 million spending package, but officials need six months to determine which projects to finance. (Correct label:implementation lag) A bill proposing a tax cut is held up in Congress by a filibuster. (Correct label:implementation lag) Congress passes an immediate tax cut for all citizens, but it is another 24 months before GDP starts to climb once again. (Correct label: impact lag)

Assume the economy is currently producing at short-run equilibrium point A. In fear that the economy is expanding beyond its long-run capabilities, government officials decide to raise taxes. Click on the equilibrium point that results from this fiscal policy decision.

Point B

Which of the following is the correct definition of the new classical critique of fiscal policy?

The effects of expansionary policy are offset by increased consumer savings.

Apply the correct description to each policy example.

The government raises the top marginal income tax rate. (Correct label: contractionary) The government orders the construction of two new aircraft carriers. (Correct label: expansionary) Congress passes a 5% decrease in marginal tax rates. (Correct label:expansionary) The government postpones funding for upgrades to the nation's railway system. (Correct label: contractionary)

Supply-side policy aims to shift the aggregate supply curve not just temporarily but permanently.

True

Expansionary fiscal policy used during economic downturns inevitably leads to a budget -. Suppose the government responds to the downturn by increasing government spending by $250 billion, but keeps tax rates the same. In this scenario, the - will rise by - $250 billion. In a recession, - falls and - rises, which means tax revenues will - even if tax rates do not change.

deficit; deficit; more than; income; unemployment; fall

The figure shows a drop in aggregate demand that, without government action, will be followed by an increase in aggregate supply. Match each label from the figure to the corresponding description.

economic output at full employment (Correct label: Y*) new long-run equilibrium (Correct label: C) equilibrium after demand drop but before supply increase (Correct label: B) initial equilibrium (Correct label: A)

What is the definition of supply-side fiscal policy?

fiscal policy aimed at impacting long-run aggregate supply rather than aggregate demand

Identify each policy action as being focused on the demand side, the supply side, or both.

lowering income tax rates at all income levels - (both) increasing spending on "shovel-ready" projects - (demand side) research grants for a corporation developing new technologies - (supply side) government-funded scholarships for college students - (supply side) stimulus packages for firms that are "too big to fail" - (demand side)

Place in chronological order the lag phenomena associated with the use of fiscal policy to smooth business cycles.

recognition lag; implementation lag; impact lag

Place the events in chronological order.

start of Great Recession; Economic Stimulus Act of 2008; national elections; American Recovery and Reinvestment Act of 2009; end of Great Recession

John F. Kennedy was endorsing - fiscal policy when he declared that lowering the top marginal income tax rate, then at -, would not only be expansionary but also lead to more government -

supply-side; 91%; revenue

The Laffer curve models - as a function of a single -. In a progressive scheme, one has to look separately at the revenue from different segments of taxpayers, corresponding to different rates. The data in the table suggests that tax cuts in the early 1980s led to - revenue from lower-income taxpayers but - revenue from the highest-income taxpayers. This would mean that reductions in the - rate, at least, made fiscal sense.

tax revenue; tax rate; less; more; top marginal

Monetary policy and fiscal policy are two different tools used by - to influence the economy. Monetary policy concerns using the national - to affect the economy, while fiscal policy uses - and expenditures in the government's -.

the federal government; money supply; taxes; budget