Macroeconomics Chapter 13
The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending assuming that the aggregate supply curve is horizontal across the range of GDP being considered?
$10 billion
An economy is experiencing a high rate of inflation. The government wants to reduce GDP (income) by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the government raise taxes to achieve its objective?
$12 billion
The following is budget information for a hypothetical economy. All data are in billions of dollars. Refer to the above table. Assume that Year 1 is the first year for this economy and Year 5 is the current year. What is the public debt in this economy at Year 5?
$125 billion
In an economy the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPS is 0.4 then it could increase government spending by:
$20 billion
Of the U.S. Federal debt held by foreigners in 2012 China held roughly:
22%
In 2012 foreign ownership of the total public debt of the U.S. was about:
33%
Which of the following fiscal policy changes would be the most contractionary?
A $10 billion increase in taxes and a $30 billion cut in government spending
Which of the following fiscal policy changes would be the most expansionary?
A $40 billion increase in government spending?
Which of the following expansionary fiscal policy changes would be most favored by those economists who think that the government is too large and inefficient?
A $40 billion tax cut
Refer to the above graph. What combination would most likely cause a shift from AD1 to AD2?
A decrease in taxes and an increase in government spending
Proponents of the notion of a "political business cycle" suggest that:
A possible cause of economic fluctuations is the use of fiscal policy by policy-makers for political purposes and goals
The public debt is the:
Accumulation of all past deficits minus all past surpluses?
Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. A sudden recession is recognized by politicians but it takes many months of political deal making before a stimulus bill is finally approved.
Administrative lag
As of 2012 most of the U.S. Federal debt was owed to:
Americans
The built-in stabilizers in the economy tend to:
Dampen the irregular swings in real GDP
Which of the following is an example of built-in stability? As real GDP decreases income tax revenues:
Decrease and transfer payments increase
You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion then what combination of actions would be most consistent with closing the GDP-gap here?
Decrease government spending and taxes?
The effect of an increase in the government budget deficit on the equilibrium level of GDP is essentially the same as a(n):
Decrease in saving
Actions by the Federal government that decrease the progressivity of the tax system:
Decrease the effect of automatic stabilizers
The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case the crowding-out effect suggests that investment spending would:
Decrease, thus partially offsetting the fiscal policy
From 1995 to 2001 the U.S. public debt relative to GDP:
Decreased, and increased since then
When the Federal government takes budgetary action to stimulate the economy or rein in inflation such policy is:
Discretionary Fiscal Policy
Most of the U.S. public debt is owed to the nation's citizens and domestic institutions. This is one reason that the public debt:
Does not impose a large burden on future generations
If a government wants to pursue an expansionary fiscal policy then a tax cut of a certain size will be more expansionary when the:
Economy's MPS is small
A given reduction in government spending will dampen demand-pull inflation by a greater amount when the:
Economy's aggregate supply curve is steep
If Congress passes legislation to increase government spending to counter the effects of a recession then this would be an example of a(n):
Expansionary fiscal policy
A decrease in government spending and a cut in taxes would be a pair of fiscal policies that reinforce each other.
False
Expansionary fiscal policy will tend to reduce the budget deficit.
False
If taxation becomes more progressive the built-in stability in the economy will decrease.
False
The crowding-out effect will be minimal when the economy is in a severe recession.
False
The goal of expansionary fiscal policy is to rein in inflation.
False
The impact of an expansionary fiscal policy may be strengthened if it crowds out some private investment spending.
False
The so-called "recognition lag" associated with fiscal policy is a result of how slowly the U.S. Congress moves.
False
A Federal budget deficit exists when:
Federal government spending exceeds tax revenues in a given year
When the Federal government uses taxation and spending actions to stimulate the economy it is conducting:
Fiscal policy
Most economists believe that fiscal policy is:
Better than monetary policy for "fine-tuning" the economy
The economy starts out with a balanced Federal budget. If the government then implements expansionary fiscal policy then there will be a:
Budget deficit
If people expected that a fiscal policy in the form of a tax cut was temporary then this policy's effect on the economy will tend to be:
Weaker
The following is budget information for a hypothetical economy. All data are in billions of dollars. Refer to the above table. In which year is there a budget surplus?
Year 1
The following is budget information for a hypothetical economy. All data are in billions of dollars. Refer to the above table. In which year is there a balanced budget?
Year 2
The following is budget information for a hypothetical economy. All data are in billions of dollars. Refer to the above table. The budget deficit was $75 billion in:
Year 5
In 2012
interest payments on the public debt, as a percentage of GDP were about:, 23 percent?
In the graph above
tax revenues vary:, Directly with the level of GDP
In 2012
the general public (excluding Federal agencies) held about what percentage of U.S. Federal debt?, 60%?
In 2012
the public debt in the U.S. on a per capita basis was about:, $52,000
Assume that if there was no crowding-out an increase in government spending would increase GDP by $100 billion. If there had been partial crowding-out however
then GDP would have:, Increased by less than $100 billion
In an economy the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25 then it could:
Increase taxes by $16 billion
Assume that if there was no crowding-out an increase in government spending would increase GDP by $100 billion. On the other hand if there had been full crowding-out then GDP would have:
Increased by $100 billion?
The crowding-out effect suggests that:
Increases in government spending may reduce private investment
The crowding-out effect tends to be stronger when the economy:
Is at, or close to, full employment
One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy:
Is not subject to the timing problems of discretionary policy
Which of the following nations had the highest public sector debt as a percentage of GDP in 2012?
Japan
Refer to the graph above. A budget surplus would be associated with GDP level:
L
To track the public debt over time and understand its significance to the economy it is best:
Measured relative to the gross domestic product
Refer to the figure above. The economy is at equilibrium at point B. What would expansionary fiscal policy do?
Move the economy from point B towards point A
When changes in taxes and government spending occur in the economy without explicit action by Congress such policy is called ______ fiscal policy:
Nondiscretionary
Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. To fight a recession Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin.
Operational lag
Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. To fight a recession the president issues an executive order requiring Federal agencies to get rid of petty regulations that burden private businesses—but the Federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.
Operational lag
Refer to the graph above. Assume that the economy initially has a price level of P1 and output level Q1. If the government implements expansionary fiscal policy and the full multiplier effect was felt it would bring the economy to:
P1 and Q3
Refer to the graph above. Assume that the economy is in a recession with a price level of P1 and output level Q1. The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new equilibrium price level and output?
P2 and Q2
Which combination of fiscal policy actions would most likely offset each other?
Increase taxes and government spending
If the crowding-out effect is at its maximum strength it follows that an increase in government spending would:
Cause aggregate demand and GDP to decrease?
If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation then this would be an example of a(n):
Contractionary fiscal policy
If there is a constitutional requirement to maintain a balanced budget then during a recession when tax revenues are shrinking the government will have to implement:
Contractionary fiscal policy
When the Federal government cuts taxes and increases spending to stimulate the economy during a period of recession such actions are design to be:
Countercyclical
The crowding-out effect arises when:
Government borrows in the money market, thus causing an increase in interest rates
A budget surplus means that:
Government revenues are greater than expenditures in a given year
The more progressive the tax system the:
Greater is the built-in stability for the economy
Automatic stabilizers smooth fluctuations in the economy because they produce changes in the government's budget that:
Help offset changes in GDP
You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion then what combination of actions would be most consistent with closing the GDP-gap here?
Increase government spending and taxes?
There is general agreement among economists that a proposed fiscal policy should be evaluated for its:
Potential positive and negative effects on long-run productivity growth
Which of the following would help a government reduce an inflationary output gap?
Raising taxes; Decreasing government spending.
Match the following scenarios in which there are problems enacting and applying fiscal policy with the correct type of problem. Distracted by a war that is going badly inflation reaches 8 percent before politicians take notice.
Recognition lag
The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n):
Recognition lag
The two reasons why bankruptcy is a false concern about the public debt are:
Refinancing and taxation
Refer to the figure above. The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation?
Shift aggregate demand by increasing taxes
Refer to the figure above. The economy is at equilibrium at point C which is below potential output. What fiscal policy would increase real GDP?
Shift aggregate demand by increasing transfer payments
The economic burden of World War II for the United States was primarily:
Shifted to future generations by bond financing?
Contractionary fiscal policy would tend to make a budget deficit become:
Smaller
One timing problem in using fiscal policy to counter a recession is the "recognition lag" that occurs between the:
Start of the recession and the time it takes to recognize that the recession has started.
If the government wishes to increase the level of real GDP it might reduce:
Taxes
Incurring an internal debt to finance a war like World War II does not pass the true cost of the war on to future generations because:
The opportunity cost of wartime expenditures was borne by the generation that lived during the war
The total amount of debt owed by the Federal government is represented by the total value of the outstanding:
U.S. government securities
Which of the following serves as an automatic stabilizer in the economy?
The progressive income tax
A major reason that the public debt cannot bankrupt the Federal government is because:
The public debt can be easily refinanced by issuing new bonds
When government spending is increased the amount of the increase in aggregate demand primarily depends on:
The size of the multiplier
In January the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February the Federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result firms cut back their borrowing to only $30 billion per month. Which of the following is true?
There is a crowding-out effect of $20 billion.
One timing problem in using fiscal policy to counter a recession is the "operational lag" that occurs between the:
Time fiscal action is taken and the time that the action has its effect on the economy
One timing problem in using fiscal policy to counter a recession is the "administrative lag" that occurs between the:
Time the need for the fiscal action is recognized and the time that the action is taken
The so-called "negative taxes" are better known as:
Transfer payments
Built-in stability is exemplified by the fact that with a progressive tax system net tax revenues decrease when GDP decreases.
True
Expansionary fiscal policy during a recession means cutting taxes increasing government spending or taking both actions.
True
It is possible for an increase in government spending to encourage instead of crowding out private investment.
True
The concept of a "political business cycle" implies a misuse of fiscal policy making it a source of economic instability.
True
The so-called crowding-out effect refers to government spending crowding out private investment spending.
True
Transfer payments that increase as GDP falls are a type of automatic stabilizer in the economy.
True