week 15

over time, potential GDP ______, which is shown by the ________ curve shifting to the right.

increase; long-run aggregate supply

are fed expenditures higher today than they were in 1960>

increased

which of the following raises the largest percentage of federal government revenue

individual income taxes

which can be changed more quickly, monetary policy or fiscal policy?

monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy

If goverment purchases were to decrease by 300 billion or if taxes were increased by 300 billion, the equilbrium level of real GDP would decrease by

more than 300 billion

after sep 11, the fed increased military spending on wars in iraq an afghan. is this increase in spending considered fiscal policy?

no, the increase in defense spending after that date was designed to achieve homeland security objectivies

the fed government increases spending on rebuilding the new jersey shore followind a hurricare, this is an example of

not a discal policy

policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge is called

supply-side economics

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

a strengthening economy could lead to a downward revision of the projected budget deficit because as GDP increases,

tax revenues increase and government spending decreases, lowering the deficit

who is responsible for fiscal policy

the federal governoment

few economists believe the federal government should attempt to balance its budget every year true or false

true

the goal of expansionary fiscal policy is

to increase aggregate demand

suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into recession, what will happen to the federal budget?

If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease

what best describes the difference between crowding out in the short run and in the long run?

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 purcahses 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

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.

two example fo automatic stabilizers in tthe us are

UNEmployment insurance payments and the progressive income tax system

which of the follwoing is an example of an expansionary fiscal polcy

a decrease in taxes

if the government cuts taxes in order to increase aggregate demand, the aciton is called

a discretionary fiscal policy

suppose the economy is initially in long-run equilibrium. The government enacts a policy to increase government spending. In the short-run, this expansionary fiscal policy will cause:

a shift from AD1 to AD2, and a movement to point , with a higher price level and higher output

the government decides to increase taxes. In the short-run, this contractionary fiscal policy will cause:

a shift from AD2 to AD1, and a movement to point D, with a lower price level and a lower output

should you disagree or agree with this statement: 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.

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

the fed pays out for unemployment insurance decreases furing an expansion

an automatic stabilizer

how might an expansionary monetary policy affect the extent of crowding out in the short run

an expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out

research conducted by edward prescott of arizone state university, and edward glaeser of harvard university along with bruce sacerdote of dartmouth college indicate that the effects of supply-side policies...

are as of now unclear and require more careful study

are federal purchases higher today than they were in 1960

as a percentage of GDP , fed purchases have decreased since 1960

the revenue of the ged collects from the indivifaul income tax declines furing a recession

automatic stabilier

government spending and taxes that increase or decrease without any actions taken by the government are referred to as

automatic stabilzers

some spending an d taxes increase or decrease with the business cycle. this event often has an effect on the economy that is similar to fidcal policy and is called

automatic stabilzers

when infrastructure investment is described as a policy lever it means that

because infrastructure investment adds to the productive capacity of the economy, policies that promote it can spur economic growth

what are difficulties congress might run into trying to balance the budget every year. Because government spending and tax revenues

change with GDP, balancing the budget annually would result in economic disruptions

if congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in gov spending or taxes?

congress and the pres should enact policies that increase gov spending and drecrease taxes

the corporate income tax rate is increased- this is part of

contractionary fiscal policy

an attempt to reduce inflation requires _______ fiscal policy, which causes real GDP to ________ and the price level to _______.

contractionary; fall, fall

what is meant by crowding out?

crowding out is a decline in private expenditures as a result of increases in governmnet purcahses

what is a contractionary fiscal policy

decreading gov spending and increasing taxes to decrease aggregate demand

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

what changes should they make if they decide a contractionary fiscal policy

enact policies that decrease gov spending and increase taxes

the individual income tax rate is decreased. this is

expansionary fiscal policy

what is an expansionary fiscal policy

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

shat is the fidderence between federal perchases and ferderal expenditures

fed purcahses require that the goc recieves a good or serivce in returen, whereas federal expenditures incrlede tansefer 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 fed gov purcheases and fed gov expenditures

gov purchases are included in gov expenditures

automatic stabilizers are

gov spending and teaxes that automatically increase or decrease along with the bsuiness cycle

The term crowding out refers to a situation where

government spending increases interest rates and decreases private investment

each year the fed runs a deficit, the federal debt whats. and each year that the federal government runs a surplus, the federal debt whats.

grows and shrinks

what is true about the federal debt

if the debt becomes very large relative to the economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt

If the government increases expenditure without raising taxes, this will

increase the budget deficit and require the government to borrow additional funds

in terms of its effect on the long-run growth rate of real GDP, it is likely to matter more if the additional government spending involves

increased spending on highways and bridges

low government borrowing costs would be relevant for the decision regarding whether a government increases infrastructure investment because

infrastructure investments are long term and expensive investments that require the use of borrowed funds

some economists argue that because increases in government spending crowd out private spending, increased government spending will reduce the long-run growth rate of real GDP. THis is most likely to happen if the private spending being crowded out is

investment spending

if a tax cut has supply-side effects, then

it will affect both aggregate demand and aggregate supply

a policy of cutting the corporate income tax to increase investment spending is intended to result in

long run supply side effects

low government borrowing costs means that

low interest rates make borrowing less expensive

the fed sells tres securities

not a fiscal policy

the ged changes the required gasoline milage for cars

not a fiscal policy

defense spending is increased. this is

not part of fiscal policy

families are allowed to deduct all their expenses for daycare from their federal income taxes. THis is

not part of fiscal policy

the federal reserve lowers the target for the federal funds rate. this is

not part of fiscal policy

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

only by the federal government

what is the cycilcally adjusted budget deficit or surplus

the cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were at potential GDP

tax wedge is

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

what is the difference between the federal budget deficit and the federal government debt?

the federal budget deficit is the year-to-year short fall in tax revenues relative to government spending (T < G + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits

a ripple effect on employment would mean

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

why might increasing taxes as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing inflation?

the legislative process experiences longer delays than monetary policy

discretionary fiscal poliyc

the pres, gv, con

tax laws have become increasingly complicated because

the tax laws are used to encourage certain activities and discourage others

the national debt is best measured as

the total value of US treasury securities outstanding

why do few economists argue that it would be a good idea to balance the federal budget every year?

to keep a balanced budget during a recession, taxes would have to increase and government expenditures would have to decrease, which would further reduce aggregate demand and deepen the recession

when the econ is experiencein an exapnsion automatic stabilizers will cause

transder payments to decrease and tax revenues to increase

the largest and fastest growing category of fed expenses is

transfer payments

how does a budget deficit act as an automatic stabilizer and reduce the severity of a recession?

transfer payments to households increase, consumers spend more than they would in the absence of social insurance programs, like unemployment, during recessions, tax obligations fall due to falling wages and profits

which of the following are categories of federal government expenditures

transfer payments, interest on the national debt, grants to state and local governmnets

automati stabilizers can reduce the severity of a recession because, during a recession,

unemployment payments rise and tz collections fall,

when is it considered "good policy" for the government to run a budget deficit?

when borrowing is used for long-lived capital goods

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