Macroeconomics Chapter 16

What would be the federal​ government's reaction if actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06​? That​ is, what step can we expect the federal government to take to control inflation in the second​ period?

All of the above 1. Increase Taxes on Businesses 2. Decrease government spending on goods and services 3. Contractionary policy

Which of the following is not a correct comparison between an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply​ model?

All of the following are correct statements about the two models: -If the economy is below full​ employment, expansionary fiscal policy will cause an increase in the price level in both models. -In the dynamic​ model, expansionary policy would be used when demand does not grow​ sufficiently; in the basic​ model, expansionary policy would be used when demand falls. -The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static.

Which of these fiscal policy actions will increase real GDP in the short run?

An increase in government expenditures

Which of these is an example of an automatic stabilizer?

An unemployment benefit program

Which of these statements about the federal debt is correct?

At some point, the government may have to raise taxes or cut spending to pay interest on the debt.

Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called

Automatic Stabilizers

If the federal government's expenditures are less than its revenue, there is a __________.

Budget Surplus

Tax Multiplier

Change in equilibrium real GDP ----------------------------------- Change in taxes

Government purchases multiplier

Change in equilibrium real GDP ------------------------------------- Change in government purchases

Fiscal Policy

Changes in the federal tax rate or changes in government spending designed to achieve some macroeconomic policy objective

The figure illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06​, we would expect the federal government to pursue​ a(n) _____________ fiscal policy. Actual GDP _________ Potential Real GDP _________ Price level _________ Unemployment _________

Contractionary decreases does not change decreases increases

What is meant by crowding​ out? Which of the following best describes the difference between crowding out in the short run and in the long​ run?

Crowding out is a decline in private expenditures as a result of increases in government purchases. In the short​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

When the tax rate increases, the size of the multiplier effect:

Decreases

All the programs that Congress authorizes on an annual basis, which are not automatically funded by the prior laws passed by Congress, are called __________.

Discretionary Spending

In what ways does the federal budget serve as an automatic stabilizer for the​ economy?

During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these occur automatically and both effects help to stabilize aggregate demand.

Consider the figures below. Determine which combination of fiscal policies shifted AD1 to AD2 in each figure and returned the economy to​ long-run macroeconomic equilibrium.

Example​ (A): Expansionary fiscal policy. Example​ (B): Contractionary fiscal policy.

The term​ "crowding out" refers to a situation​ where:

Government spending increases interest rates and decreases private investment.

Which type of fiscal policy would cause the move of the AD curve represented in this graph?

Higher government spending (expansionary)

The goal of expansionary fiscal policy is

Increase Aggregate Demand

Budget deficits automatically __________ during recessions and __________ during expansions.

Increase, decrease

Which of these would be a fiscal policy the government might want to use if the economy is operating at too high a level of output?

Increasing income tax rates

Which of these are the largest sources of federal government revenues?

Individual income taxes and social security withholdings

Consider the figure. An increase in government spending shifted the aggregate demand curve from AD1 to AD2. As a​ result, both price level and real GDP increased. What can be​ said, however, about the increase in real​ GDP?

It increased by less than indicated by a multiplier with a constant price level. Due to the​ upward-sloping short-run aggregate supply​ curve, the shift in aggregate demand results in a higher price level. In the new​ equilibrium, point​ C, both real GDP and the price level have increased.

The initial equilibrium can be point​ A, B, or C. Of the following​ choices, which shows the most effective tax code​ simplification?

It shifts from LRAS1 to LRAS3. With tax reductions and​ simplifications, long-run aggregate supply shifts further to the​ right, to ​, equilibrium moves to point​ C, the price level falls further to​ p3, and real GDP increases further to Y3.

Fiscal Policy vs Monetary Policy

Monetary policy refers to the actions of central banks to achieve macroeconomic policy objectives Fiscal policy refers to the tax and spending policies of the federal government.

Complete the following table for a static​ AD-AS model:

Recession Expansionary ↑Gov't spending or decrease taxes Real GDP and price level rise Rising inflation Contractionary Decrease gov't spending or ↑Taxes Real GDP and price level fall

Automatic stabilizers

Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers -automatically increase or decrease along with the business cycle.

Crowding out

The decline in private expenditures that results from an increase in government purchases

Which of these statements is true about using fiscal policy to stabilize the economy?

The delay caused by the legislative process is typically longer for fiscal policy than for monetary policy.

If the​ short-run aggregate supply curve​ (SRAS) were a horizontal​ line, what would be the impact on the size of the government purchases and tax multipliers

The impact of the multiplier would be larger if the SRAS curve is horizontal.

Which of these is the main reason for the long-run funding problems of Social Security?

The number of workers per retiree continues to decline.

Multiplier effect

The series of induced increases in consumption spending that results from an initial increase in autonomous expenditures.

Budget Deficit

a shortfall of tax revenue from government spending

Stabilization Policy

a strategy enacted by a government or its central bank that is aimed at maintaining a healthy level of economic growth and minimal price changes -should smooth the GDP and keep the economy closer to the full employment level of output

Budget Surplus

an excess of tax revenue over government spending

Every time the federal government runs a budget deficit, the Treasury must:

borrow funds from savers by selling U.S. Treasury securities.

​One-time tax​ rebates, such as those in 2001 and​ 2008, increase consumption spending by less than a permanent tax cut because​ one-time tax rebates increase

current income (Permanent​ income: Reflects​ consumers' expected future income. Current​ income: Reflects​ consumers' current disposable income. Liquidity​ constrained: The spending of this type of consumer is more likely to depend on their current income.)

Contractionary Fiscal Policy

decreasing government purchases or increasing taxes. -Will cause AD to move left

The American Recovery and Reinvestment Act of 2009 is a clear example of:

expansionary fiscal policy

Government policies that increase aggregate demand are called __________.

expansionary policies

Supply-Side Economics

holds that increasing the supply of goods translates to economic growth for a country. In supply-side fiscal policy, practitioners often focus on cutting taxes, lowering borrowing rates, and deregulating industries to foster increased production.

Assume the tax multiplier is estimated to be 1.1 and the aggregate supply curve has its usual upward slope. Suppose the government lowers taxes by ​$112 million. Aggregate demand will _________ by $____ million.

increase $123.2 mil (1.1 x 112 = 123.2 mil)

When the economy is in a recession, the government can:

increase government purchases or decrease taxes in order to increase aggregate demand.

Expansionary Fiscal Policy

increasing government purchases or decreasing taxes. - Will cause AD to move right

The cyclically adjusted budget deficit:

is measured as if the economy were at potential real GDP.

According to the multiplier effect increase in government, purchases increases real GDP by ______________ the initial increase in government purchases.

more than

If government purchases were to decrease by​ $300 billion or if taxes were increased by​ $300 billion, the equilibrium level of real GDP would decrease by _______. Therefore, the statement above is _________.

more than $300 billion incorrect

We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier.

smaller

tax wedge

the difference between the pretax and posttax return to an economic activity

The national debt is best measured as the:

total value of U.S. Treasury securities outstanding.

The largest and fastest growing category of federal expenditures is __________.

transfer payments

What is meant by​ supply-side economics?

​Supply-side economics refers to the use of taxes to increase incentives to​ work, save,​ invest, and start a business in order to increase​ long-run aggregate supply.

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not​ increase?

​Yes, because fiscal policy and monetary policy are separate things.

An attempt to reduce inflation requires​ _____________ fiscal​ policy, which causes real GDP to​ _________ and the price level to​ __________.

​contractionary; fall; fall