Macro Final

when the economy is operating well below its full-employment capacity and the marginal propensity to consume is 3/4, a $10 billion increase in investment will cause the equilibrium income to rise by

$40 billion

From 1990 to the year 2000, real federal spending rose about 21%, while from 2000 to 2010, real federal spending rose by about

59%

Which of the following is true of debt financing?

Elected political officials will find debt financing attractive because it allows them to provide voters with visible current benefits while pushing the more visible costs into the future

If the government owes $15.0 trillion and then borrows $900 billion more this year, this leads to

a debt of $15.9 trillion and a deficit of $900 billion

Which of the following helped transform the budget deficits of the early 1990s into surpluses later in the decade?

a reduction in defense expenditures following the end of the Cold War

Which of the following is most likely to increase the incentive to invest, produce, and employ others?

a reduction in tax rates

Which is more likely to stimulate aggregate demand in a timely manner?

a spending increase, because disbursement can take place quickly while a tax cut will be spread out over several years

Compared to a reduction in tax rates, a one-time tax rebate will exert

a weaker impact on aggregate demand because the increase in the incentive to earn and impact on long-term income will be smaller for the temporary tax cut

According to the new classical theory, a $50 billion increase in government expenditures financed by a $50 billion increase in the budget deficit will

be largely offset by a reduction in private spending because individuals will anticipate higher future taxes

The crowding-out effect suggests that

budget deficits that lead to higher interest rates reduce private investment spending

Long lags make discretionary policy less effective because

by the time the impact of a policy is felt, the problem may have been corrected by market forces

Supply-side economics stresses that

changes in marginal tax rates exert important effects on real output and employment

Which of the following best illustrates the use of discretionary countercyclical fiscal policy?

congress passes a bill authorizing $100 billion in additional spending when it receives news of a deepening recession

Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called

countercyclical fiscal policy

If the government ran major budget deficit, and there was no noticeable effect on the level of GDP, this could be taken as evidence of

crowing-out

Refer to figure 11-2. If an economy operates in the short run at point A, Keynesian analysis indicates that restrictive fiscal policy will

decrease SRAS and move the economy toward point C

Changes in government spending and/or taxes as the result of legislation, is called

discretionary fiscal policy

According to new classical economists, the most appropriate policy during a recession would be for the government to

do nothing

Since the mid 1980s, the debt-to-income ratio of American households

has rapidly increased

If the government increases its spending, which of the following would tend to reduce the size of the multiplier?

higher taxes for the finance of the additional spending, higher interest rates as the result of additional borrowing to finance the spending, the flow of the spending into sectors where the unemployment is low (all of the above)

During 1960-1980, those with the highest incomes confronted federal marginal tax rates between 70 and 90 percent. Since 1986, the highest federal income tax rate has been less then 40 percent. since 1986, the share of the personal income tax collected from the top now-half of one percent of earners has been

higher than during the 1960s and 1970s

In the midst of the Great Depression in 1932, Congress and the Hoover administration increased tax rates substantially. According to the Keynesian view, this tax increase was

inappropriate because it would depress economic activity and lead to further increases in unemployment

In response to the recession of 2008-2009, the United States

increased government spending as a share of the economy and enlarged the size of the budget deficit

The government is pursuing an expansionary fiscal policy if it

increases government spending and/or reduces taxes

Keynesian economists believed that the prolonged unemployment of the 1930s was the result of

insufficient aggregate demand and the failure of the market forces to direct the economy back to full employment.

Measured as a share of GDP, the total federal debt

is now approximately 100% of GDP, which is higher than any time since the years immediately following World War 2

If the government cuts the tax rate, workers get to keep

more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right

If policymakers cut taxes because they perceive that recession is a major threat, a proponent of the new classical view will be most likely to argue that the tax cut is

not very important because the "demand stimulus effects" of lower current taxes will be largely offset by the expectation of higher taxes in the future

Keynes rejected the view that lower wages would direct a recessionary economy back full employment because

powerful trade unions and large corporations made wages highly inflexible

Refer to figure 11-2. Which of the following will a Keynesian most likely favor if the economy is operating at point A?

restrictive fiscal policy

Refer to figure 11-2. When the economy is operating at point A, reliance on the self-correcting mechanism will

result in higher resource prices and a shift to the left in the SRAS curve, and lead to higher interest rates and a shift to the left in the AD curve. (do both A and D)

According to the Keynesian view, the prolonged unemployment of the Great Depression

resulted because, the total expenditures on goods and services were less than the full employment rate of output.

Which of the following is an example of an automatic stabilizer?

revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation has been enacted.

Unemployment compensation payments

rise during a recession and thereby help stimulate consumption

Mathematically, the marginal propensity to consume is

the change in consumption divided by the change in income

The primary tool of fiscal policy is

the federal budget

When household debt as a share of income is abnormally high,

the growth of consumption is likely to remain sluggish even as the economy begins to recover

Which of the following will be most likely to dampen the expansionary effects of an increase in government spending financed by borrowing

the increase in demand for loanable funds as the result of borrowing will cause interest rates to rise and private investment to fall

In the Keynesian view, equilibrium takes place when

the level of total spending in the economy is equal to current output

when the federal government is running a budget deficit

the size of the national debt will decline

In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates,

there will be an inflow of foreign capital , which will cause the dollar to appreciate and net exports to decline

If the economy is experiencing less then full-employment, the Keynesian model recommends that the government

undertake expansionary fiscal policy to stimulate aggregate demand

According to the Keynesian view, the proper response to a severe recession would be

an increase in government spending financed by borrowing

the multiplier principle is important because it

shows why small shifts in investment have a powerful influence on national income