Quiz 8

deflation

is the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation

Scenario: Fiscal Policy Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. Reference: Ref 13-11 (Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose the government decides to tax its citizens. The tax multiplier is:

less than the government spending multiplier

GDP (Gross Domestic Product)

the final goods and services produced within the economy with in a year

For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is larger than the multiplier effect of a tax cut of $100 billion because:

in the first round of spending only $90 billion of the tax cut will be spent and $10 billion will be saved, while the entire $100 billion of government purchases will be spent.

The income expenditure model predicts that if the marginal propensity to consume is 0.75 and the federal government increases spending by $100 billion, real GDP will increase by:

$400 billion

(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output is a(n):

. increase in transfer payments.

(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be appropriate to use contractionary fiscal policy to shift aggregate demand in _____ from _____.

. panel (b); AD1 to AD2

If the marginal propensity to consume is 0.75, the multiplier for government purchases of goods and services will be:

4

Scenario: Fiscal Policy Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. Reference: Ref 13-11 (Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. The government spending multiplier is:

4

Aggregate Demand

C+I+G+Nx

(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. In panel (a), the economy is initially at output level Y1 and there is:

a recessionary gap.

(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. In panel (b), if real GDP is equal to Y1, there is:

an inflationary gap

Fiscal policies that require no government action but that are expansionary when the economy contracts and contractionary when the economy expands are known as:

automatic stabilizers

(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. Appropriate fiscal policy action is:

decrease in transfer payments

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

decrease taxes

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _____ government purchases of goods and services by _____ .

decrease; 40 billion

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is ADʺ, the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.

decrease; maintain

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is ADʺ, the most appropriate discretionary fiscal policy is to _____ government transfer payments and _____ income tax rates.

decrease;increase

The automatic stabilizer in government tax revenue that occurs when GDP rises _____ the multiplier.

decreases

(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. The government should _____ aggregate demand by _____ taxes to close the _____ gap.

expand; cutting; recessionary

The 2009 U.S. stimulus was a(n) _____ fiscal policy that _____ aggregate demand.

expansionary; increased

(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____ .

expansionary; right

Consumer spending will likely rise if:

government transfer rise

Budget deficits almost always:

increase when unemployment increases and fall when unemployment falls.

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _____ transfer payments by _____ $40 billion.

increase; more than

The federal government's largest source of revenue is:

personal income and corporate profit taxes

Which of the following is a government transfer

Social Security payments to retired auto workers

(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. It reflects a short-run inflationary gap. According to the labeling on the graph, the size of the inflationary gap is equal to:

Y1 - YP.

Government tax revenue rises and falls with the business cycle as:

an automatic stabilizer

Inflation

an increase in the general price level

(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. If the economy is at equilibrium at E1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

contractionary; left

(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y1 and P1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

contractionary; left

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD, the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.

increase maintain

Scenario: Fiscal Policy Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. Reference: Ref 13-11 (Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. If actual output is 500 billion arcs, to restore the economy to potential output the government should _____ by 25 billion arcs.

increase spending

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD', the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.

increase;decrease

The government has a budget deficit if:

its total revenues are less than its total expenditures

(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. Which of the following would be the appropriate response on the part of the government upon viewing the state of the economy?

raise taxes to close the inflationary gap

Scenario: Fiscal Policy Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. Reference: Ref 13-11 (Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose actual real GDP in Arcadia is 500 billion arcs. This economy has:

recessionary gap

Which of the following is an automatic stabilizer?

unemployment compensation payments