Macro ch16

Suppose that Congress and the President are considering an increase in government expenditures of $50 billion. They consult with two economists: Alan and Robert. Alan believes that the marginal propensity to consume (MPC) is 0.9 and Robert believes that it is 0.5. If Alan is correct, then the increase in government spending will cause GDP to increase by ______, and if Robert is correct, then the government spending increase will cause GDP to increase by ________.

$500 billion ; $100 billion Change in G*(1/1-MPC)

Which of the following is true? A) The ʺmultiplier effectʺ occurs when spending by the government increases the incomes of some people, which causes them to increase their spending, which increases the incomes of other people, and so on. B) The ʺcrowding out effectʺ is less of a problem if actual GDP is greater than potential GDP. C) The ʺmuliplier effectʺ becomes larger as the marginal propensity to consume becomes smaller. D) The ʺcrowding out effectʺ refers to the decrease in imports than occurs when exports increase. E) More than one of the above is correct.

A) The ʺmultiplier effectʺ occurs when spending by the government increases the incomes of some people, which causes them to increase their spending, which increases the incomes of other people, and so on.

Consumption (Dollars): $600 900 1,200 Disposable Income (Dollars): $1,000 1,500 2,000 5) Refer to Table 11-2. Given the consumption schedule in the table above, the marginal propensity to consume is

Change consumption/change consume = 300/500 = 0.6

If (the absolute value of ) the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be ____________ to restore the economy to potential

cut by $250 billion (0.4/1.6=0.25)

Refer to Figure 12‐1. Suppose the economy is at point D. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing.)

decrease government spending

Decreasing government spending ________ the price level and ________ equilibrium real GDP in the short run

decreases; decreases

Compare the time lags involved in stabilizing the economy using monetary and fiscal policy. Inside lags are likely longer for _______ policy and outside lags are likely longer for _______ policy.

fiscal ; monetary (inside fisting gives outside money)

An increase in government spending causes money demand to _________, which causes interest rates to _________, which causes investment spending to __________. This is known as ʺcrowding outʺ

increase ; increase ; decrease

An increase in government spending causes money demand to _________, which causes interest rates to _________, which causes investment spending to __________. This is known as ʺcrowding outʺ.

increase ; increase ; decrease

Refer to Figure 12‐1. Suppose the economy is at point B. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing.)

increase government spending (spending=up)

Refer to Figure 12‐1. Suppose the economy is at point D. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing.)

increase taxes (taking=down)

Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand

increase; increase

If the MPC is 0.8, real GDP is $15 trillion, and potential real GDP is $13 trillion, then taxes would need to be ____________ to restore the economy to potential real GDP

increased by $0.5 trillion change in GDP = (13-15)=-2 -2=x*(-.8/(1-.8)

If (the absolute value of ) the tax multiplier equals 1.6, real GDP is $13.8 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be ____________ to restore the economy to potential real GDP.

increased by $250 billion

Refer to Figure 15‐1 (SRAS intersection AD behind LRAS). Keynes argued that the economy could get stuck at a point like point A in the above graph. What did Keynes advocate in order to get the economy ʺunstuckʺ?

increases in government spending (spend = forward)

In the short run, expansionary fiscal policy ________ the price level and ________ equilibrium real GDP

increases; increases

Given our class discussion, we expect that poor people have ________ MPCs than richer people. Thus, a tax cut given to poor people would have a __________ multiplier effect than one given to richer people

larger ; larger (marginal prosperity to consume)

If there are multiplier effects, then an increase in government purchases of $200 billion will shift the aggregate demand curve to the right by

more than $200 billion

The economy is in long-run equilibrium. Technological change shifts the long-run aggregate supply curve $120 billion to the right. At the same time, government purchases increase by $30 billion. If the MPC equals 0.8 and the crowding-out effect is $60 billion, we would expect that in the long-run

real GDP would be higher but the price level would be lower.

The economy is in long-run equilibrium. Technological change shifts the long-run aggregate supply curve $120 billion to the right. At the same time, government purchases increase by $30 billion. If the MPC equals 0.8 and the crowding-out effect is $30 billion, we would expect that in the long-run,

real GDP would be higher but the price level would be the same.

Government budget deficits are most likely to increase during economic ____________.

recessions

During recessions, government expenditure automatically

rises, because of programs such as unemployment insurance and Medicaid.

Suppose the federal budget deficit for the year was $100 billion and the economy was in a recession. If the economy had been at potential GDP, it is estimated that tax revenues would have been $60 billion higher and government spending on transfer payments $50 billion lower. Using these estimates, the cyclically adjusted budget

surplus was $10 billion (60-50)

Suppose the federal budget deficit for the year was $100 billion and the economy was in a recession. If the economy had been at potential GDP, it is estimated that tax revenues would have been $60 billion higher and government spending on transfer payments $50 billion lower. Using these estimates, the cyclically adjusted budget

surplus was $10 billion.

During a recession, what automatically (due to ʺautomatic stabilizersʺ) happens to the governmentʹs budget situation?

tax revenues fall, government spending increases, and the budget deficit gets larger

It is estimated that the tornadoes in Alabama earlier this year caused $645 million of damage in Jefferson County, Alabama alone. Suppose that Ben Gleck, a news analyst on the Coyote News Network, argues that the tornado, while tragic, will have a positive impact on the U.S. economy as it will create jobs for those involved in the clean up and reconstruction, and thus increase the amount of employment in the U.S.. Mr. Gleckʹs argument is an example of

the broken window fallacy

Crowding out will be greater

the more sensitive investment spending is to changes in the interest rate.