Macroeconomics Chapter 27

Select the answer below that best corrects the following​ statement: ​"A contractionary fiscal policy involves a decrease in government purchases or a decrease in​ taxes."

A contractionary fiscal policy involves the decrease of government purchases​ and/or an increase in taxes in order to decrease aggregate demand.

Which of the following is an example of an expansionary fiscal​ policy?

A decrease in taxes.

Suppose the economy is initially in​ long-run equilibrium. The government enacts a policy to decrease taxes. In the​ short-run, this expansionary fiscal policy will​ cause:

A shift from AD 1 to AD 2 and a movement to point​ B, with a higher price level and higher output.

A political commentator​ argues: ​"Congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are​ unpopular." Briefly explain whether you agree.

Agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy.

Select the answer below that best corrects the following​ statement: ​"An expansionary fiscal policy involves an increase in government purchases or an increase in​ taxes."

An expansionary fiscal policy involves the increase of government purchases​ and/or a decrease in taxes in order to increase aggregate demand.

Are federal expenditures higher today than they were in​ 1960?

As a percentage of​ GDP, federal expenditures have increased since 1960.

Are federal purchases higher today than they were in​ 1960?

As a percentage of​ GDP, federal purchases have decreased since 1960

What is a contractionary fiscal​ policy?

Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.

What is an expansionary fiscal​ policy?

Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.

The multiplier effect is only a consideration for increases in government purchases.

False

What is the difference between federal purchases and federal​ expenditures?

Federal purchases require that the government receives a good or service in​ return, whereas federal expenditures include transfer payments.

What is fiscal​ policy?

Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives

What is the difference between federal government purchases​ (spending) and federal government​ expenditures?

Government purchases are included in government expenditures.

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?

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., If the economy is below full​ employment, expansionary fiscal policy will cause an increase in the price level in both models., The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static.

What changes should they make if they decide a contractionary fiscal policy is​ necessary?

In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes?

In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes.

The graph to the right shows a situation in which the economy was in equilibrium at potential GDP​ (at point​ A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential​ GDP?

Increase government spending or decrease taxes.

Consider the figure to the right. An increase in government spending shifted the aggregate demand curve from AD 1AD1 to AD 2AD2. 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.

The federal government collected less in total individual income taxes in 1983 than in 1982. Can we conclude that Congress and the president cut individual income tax rates in​ 1983?

No. It could be that the economy​ contracted, so less income was earned and less was paid in tax.

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

If Congress and the president are successful in keeping real GDP at its potential level in​ 2019, state whether each of the following will be​ higher, lower, or the same as it would have been if they had taken no​ action:

Real GDP will be​ higher, potential GDP is​ unchanged, the inflation rate will be​ higher, and the unemployment rate will be lower.

Who is responsible for fiscal​ policy?

The federal government controls fiscal 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.

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending?

Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending.

The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.

True

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.

Was this piece of legislation an example of fiscal​ policy?

Yes, because the primary goal of the spending program was to stimulate the national economy.

Congress and the president enact a temporary cut in payroll taxes. This is an example of

a discretionary fiscal policy.

If the government cuts taxes in order to increase aggregate​ demand, the action is called

a discretionary fiscal policy.

The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of

an automatic stabilizer

The revenue the federal government collects from the individual income tax declines during a recession. This is an example of

an automatic stabilizer.

Changes in taxes and spending that happen without actions by the government are called

automatic stabilizers.

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.

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

contractionary; fall; fall

​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

___________ represent total government spending including​ goods, services, grants to state and local​ governments, and transfer payments.

government expenditures

_____________ are spending by the government on​ goods, services, and factors of production.

government purchases

Automatic stabilizers are

government spending and taxes that automatically increase or decrease along with the business cycle.

Since the​ 1950s, total government​ expenditures, as a percentage of​ GDP, have _____________ and total government​ purchases, as a percentage of​ GDP, have ________________

increased, decreased

The federal​ government's day-to-day activities include running federal agencies like the Environmental Protection​ Agency, the​ FBI, the National Park​ Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up

less than 10 percent of federal government expenditures

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

more than​ $300 billion.

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

none of the above are correct statements about the two models.

The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of

not a fiscal policy

The Federal Reserve sells Treasury securities. This is an example of

not a fiscal policy.

The federal government changes the required gasoline mileage for new cars. This is an example of

not a fiscal policy.

Economists use the term fiscal policy to refer to changes in taxing and spending policies

only by the federal government

The higher the tax​ rate, the_____ the multiplier effect.

smaller

A spokesperson for the California state agency in charge of the project mentioned that the Caldecott tunnel project would have a​ "ripple effect" on employment. The ripple effect meant that

the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers.

As the tax rate​ increases,

the multiplier effect decreases

The major cause of these trends is

there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance.

The goal of expansionary fiscal policy is

to increase aggregate demand.

Which of the following are categories of federal government​ expenditures?

transfer payments

When the economy is experiencing a recession automatic stabilizers will​ cause:

transfer payments to increase and tax revenues to decrease.

Since World War​ II, the federal​ government's share of total government expenditures has been between

two-thirds and​ three-quarters.

Two examples of automatic stabilizers in the U.S. are

unemployment insurance payments and the progressive income tax system.

Automatic stabilizers can reduce the severity of a recession​ because, during a​ recession,

unemployment payments rise and tax collections​ fall, providing more spending ability to push the economy back to full employment.

Over​ time, potential GDP​ ________, which is shown by the​ ________ curve shifting to the right

​increases; long-run aggregate supply