Macro Exam #3

_______ would encourage Congress and the president to try to conduct _____ expansionary fiscal policy. A.) an unemployment rate greater than the natural rate of unemployment; counter cyclical B.) an unemployment rate greater than the natural rate of unemployment; procyclical C.) an increase in the inflation rate; countercyclical D.) an increase in the inflation rate; procyclical

A.) an unemployment rate greater than the natural rate of unemployment; counter cyclical Unemployment greater than natural unemployment is a symptom at a recession.

During a recession, the automatic stabilizers cause tax revenue to ______ and spending on transfer payments to _______, so a government with a balanced budget automatically moves to a budget _________. A.) decrease; increase; deficit B.) decrease; increase; surplus C.) increase; decrease; deficit D.) increase; decrease; surplus

A.) decrease; increase; deficit

Countercyclical_____ fiscal policy would fight inflation; while procyclical _____ fiscal policy would cause inflation. A.) contractionary; contractionary B.) contractionary; expansionary C.) expansionary; contractionary D.) expansionary; expansionary

B.) contractionary; expansionary

When the economy is in the expansion phase of the business cycle, the automatic stabilizers cause transfer payments to _______ and household and form tax liabilities to _________. A.) decrease; decrease B.) decrease; increase C.) increase; decrease D.) increase; increase

B.) decrease; increase

The federal government can shift the aggregate demand curve to the left by_______ government purchases and/or _______ personal income tax rates and/or business tax rates. A.) decreasing; decreasing B.) decreasing; increasing C.) increasing; decreasing D.) increasing; increasing

B.) decreasing; increasing Government purchases decrease then Aggregate demand will shift left and personal income tax rates increase

Holding all else constant, to eliminate a budget deficit caused by a recession, the government would have to ______ tax rates and/or ________ government purchases, which would shift AD _________. A.) decrease; increase; left B.) decrease; increase; right C.) increase; decrease; left D.) increase; decrease; right

C.) increase; decrease; left

Which of the following is an example of fiscal policy? A.) A state government decreases personal income tax rates to stimulate the economy of the state. B.) The federal government raises pollution tax rates to encourage firms to reduce air pollution. C.) The federal Reserve decreases interest rates to stimulate the U.S economy. D.) The federal government increases business tax rates to fight inflation E.) More than one of the following is correct.

D.) The federal government increases business tax rates to fight inflation. Fiscal policy defined as changes in Fed taxes and purchases that are intended to achieve macro policy goals.

Which of the following is not an example of an automatic stabilizer? A.) unemployment insurance payments increase during a recession. B.) welfare payments decrease during an expansion. C.) households' income tax liability increases during an expansion. D.) congress passes legislation during a recession to decrease business tax rates. E.) all of the above are examples of automatic stabilizers.

D.) congress passes legislation during a recession to decrease business tax rates. (this is an example of discretionary fiscal policy)

True/ False The automatic stabilizers return the economy to long-run macroeconomic equilibrium.

False, The automatic stabilizers make recession and inflation less severe. Long-run macroeconomic equilibrium is where aggregate supply and aggregate demand meet eachother.

True/False The automatic stabilizers affect short-run aggregate supply.

False, automatic stabilizers affect aggregate demand.....automatic mechanism affects short run aggregate supply.

True/False Monetary and fiscal policies are pro-cyclical if they are implemented before the automatic mechanism has adjusted the economy back to long-run macroeconomic equilibrium.

False, countercyclical = before pro-cyclical = after

True/False The cyclically adjusted budget deficit includes the effects of the automatic stabilizers.

False, excludes the effects by issuing the economy is at potential GDP.

True/False Holding all else constant, contractionary fiscal policy decreases real GDP, the unemployment rate, and price level.

False, increase unemployment rate

True/False In the U.S. the largest component of federal government expenditures is interest payments on debt.

False, smallest component is (G) Largest is (TR) Transfer payments

True/False Monetary Policy cannot eliminate the business cycle, but fiscal policy can.

False, the business cycle cannot be eliminated by either of these.

True/False Holding all else constant, if the government changes tax rates and or government purchases to eliminate a budget deficit caused by a recession, it will make the recession worse.

True

True/False Holding all else constant, pro-cyclical contractionary fiscal policy meant to fight inflation will cause recession

True

True/False Holding all else constant, to eliminate a budget surplus caused by an expansion, the government would have to decrease tax rate and/or increase government purchases.

True

True/False Holding all else constant, expansionary fiscal policy can increase consumption, investment, and government purchases.

True Increase consumption= by decreasing personal income tax. Increase investment= by decreasing tax rates

True/False Congress and the president can fight a recession by increasing government purchases, decreasing personal income tax rates, and/ or decreasing business tax rates.

True, all these would increase aggregate demand and fight recession

True/False The automatic stabilizers are never procyclical

True, are always countercyclical and never destabilizing.

True/False Fiscal policy is more likely to be procyclical than monetary policy is.

True, fiscal policy takes time to approve and implement, monetary policy can be implemented right away

True/ False Both contractionary monetary policy and contractionary fiscal policy decrease aggregate demand.

true