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Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, the government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end of the fiscal year, the debt is:

$7.5 trillion.

(Scenario: Fiscal Policy) Refer to the information provided in the scenario. The government spending multiplier in Arcadia is equal to:

3

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If current real GDP is $850, which of the following policies would bring the economy to potential output?

Decrease government spending by $10 billion.

Economists believe that the budget should be balanced each fiscal year. Is this correct?

No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

If the economy exhibited an inflationary gap, the government should follow:

a contractionary policy, which would shift the AD curve to the left.

Government transfer payments rise when the economy is contracting and fall when the economy is expanding. In this role, transfer payments are described as:

automatic stabilizers.

What can the federal government do to finance a deficit?

borrow funds

(Scenario: Fiscal Policy) Refer to the information provided in the scenario. If actual output is 500 billion arcs, what should the government do to restore the economy to potential output?

increase government spending by 25 billion arcs

When the budget is in deficit, the government generally:

increases the public debt.

The stability pact, signed by many of the European countries that adopted the euro, limited each member nation's deficit to 3% of GDP. This:

limited each member country's ability to use fiscal policy.