Ch. 13 HW - Lori

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. At E1, the economy:

has a recessionary gap.

After passage of the American Recovery and Reinvestment Act in 2009 government borrowing _____, and interest rates_____.

increased; remained very low

To close an inflationary gap with fiscal policy, the government could:

reduce budget allocations to interstate highway maintenance.

The fact that tax receipts fall during a recession:

reduces the adverse effect of the initial fall in aggregate demand.

Expansionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.

right; recessionary

If there is an inflationary gap in the economy, discretionary fiscal policy will likely include action to:

shift aggregate demand to the left.

When the unemployment rate decreases, the budget:

surplus gets larger or the deficit gets smaller.

When the unemployment rate increases, the budget:

tends to move into deficit.

Which of the following is NOT a government transfer payment?

the federal payroll

Consumer spending will likely fall if:

the government raises tax rates.

If the marginal propensity to consume is 0.9, then the tax multiplier will be:

less than 10

Expansionary fiscal policies:

make the budget surplus smaller.

An expansionary fiscal policy:

may include decreases in taxes.

(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.

Discretionary fiscal policy refers to changes in:

government spending or taxes to close a recessionary or inflationary gap.

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD3 to AD1 could be caused by:

higher tax rates.

(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

If overall spending declines and thus the economy contracts, the government could counter this by:

increasing government spending.

One of the shortcomings of fiscal policy is that:

it has time lags, so sometimes it may end up destabilizing the economy.

The stability pact signed in 1999 by the European nations that adopted the euro required each country to:

keep its actual budget deficit below 3% of its GDP.

Discretionary fiscal policy may fail to stabilize the economy or may even make the economy less stable because of:

lags in deciding on and implementing a policy change.

The multiplier effect of changes in government transfers is:

less than the multiplier effect of a change in government spending.

The stability pact signed by many of the countries that adopted the euro limited each member nation's deficit to 3% of GDP. This:

limited member countries' ability to use fiscal policy.

The U.S. national debt as a percentage of GDP is _____ that of Greece.

lower than

(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

A cut in taxes will have the most effect on aggregate demand if it is given to:

people with a high marginal propensity to consume.

All of the following are examples of fiscal policy EXCEPT:

reducing the money supply to raise the interest rate.

If the marginal propensity to consume is 0.9, then the government spending multiplier is:

10.

If the marginal propensity to consume is 0.8 and government transfers decrease by $50 million, then equilibrium GDP will decrease by:

$200 million.

Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this recessionary gap.

(WRONG) A $25 billion increase in government spending

If _____, expansionary fiscal policy is most likely to crowd out private spending.

(WRONG) aggregate income is $800 billion below its potential level

If _____, expansionary fiscal policy is most likely to crowd out private spending.

(WRONG) aggregate output is $300 billion below its potential level

(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.

(WRONG) decrease; maintain

An increase in government transfers is an example of _____ fiscal policy because it shifts the aggregate demand curve to the _____ aggregate output.

(WRONG) expansionary; left, increasing

If the marginal propensity to consume is 0.75 and transfer payments increase by $30 billion, real GDP will:

(WRONG) increase by more than $120 billion.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD:

(WRONG) the economy is in an inflationary gap.

(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. The economy is in short-run equilibrium. To move the economy to potential GDP, the government should reduce its spending by an amount equal to:

(Y1 - YP)(1 - MPC).

Which of the following is NOT an argument AGAINST the use of expansionary fiscal policy?

Government borrowing may reduce the marginal propensity to consume.

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $850 billion, which of the following policies would bring the economy to potential output?

Increase taxes by $12.5 billion.

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following is the most likely result?

The economy will move into a recession.

Which of the following is NOT an example of government transfers?

a reimbursement of personal income tax withheld from wages

(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

Consider an economy whose households save 20% of increases in their income. If the government lowers its transfers by $100 billion, then the real GDP will:

decrease by $400 billion.

If the marginal propensity to consume is 0.75 and taxes increase by $30 billion, real GDP will:

decrease by less than $120 billion.

If the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to _____, which will shift the AD curve to the _____.

decrease government purchases; left

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $850 billion, to bring the economy to potential output the government should:

decrease spending by $10 billion.

A change in taxes or a change in government transfers affects consumption through its effect on:

disposable income.

An increase in government spending of $300 billion and a tax cut of $300 billion will have _____ effects on the budget balance and _____ effects on real GDP.

equal; unequal

Assume that the marginal propensity to consume is 0.8. Government purchases of goods and services increase by $100 billion, financed by a $100 billion tax increase. Real GDP will:

expand by $100 billion.

(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

Automatic stabilizers are government spending and taxation changes that cause fiscal policy to be _____ when the economy contracts.

expansionary

A recessionary gap can be closed with:

expansionary fiscal policy.

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

expansionary; increased

If legislation required the budget to be balanced at all times, _____ as an automatic stabilizer of the business cycle.

fiscal policy could not operate

The cyclically adjusted budget deficit:

fluctuates less than the actual budget deficit.

Social insurance programs are:

government programs intended to protect families against economic hardships.

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.

Suppose that marginal propensity to consume is equal to 0.9 and the government increases its spending by $200 billion. This increase in spending is financed by a $200 billion increase in taxes. As a result of this, GDP will:

increase by $200 billion.

If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.

increase government purchases; AD; right

Suppose the economy is in a recessionary gap. A $100 billion _____ is likely to increase real GDP by the largest amount.

increase in government purchases

If the marginal propensity to consume is 0.1, then the tax multiplier is:

less than 10.

If the marginal propensity to save is 0.25, investment spending is $600 million, and the government increases its transfers by $100 million, then real GDP increases by:

$300 million.

If the marginal propensity to save is 0.25, investment spending is $700 million, and the government increases its purchases of goods and services by $100 million, then real GDP increases by:

$400 million.

Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, its purchases of goods and services and its transfers are $2 trillion, and tax revenues are $1.5 trillion. At the end of the fiscal year, the debt is:

$7.5 trillion.

If the marginal propensity to consume is 0.9, then the government spending multiplier is:

(WRONG) 0.1.

(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E2. If there is a decrease in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD2; left; decrease; decrease

(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E2. If there is an increase in taxes_____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD2; left; decrease; decrease

(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E2. If there is an increase in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD2; right; increase; increase

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $700 billion, which of the following policies would bring the economy to potential output?

Decrease taxes by $25 billion.

Suppose the economy is operating at an output level of $5,400 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this inflationary gap.

Decreasing government purchases of goods and services by $100 billion

Do economists believe that the budget should be balanced each fiscal year?

No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

(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 tax rates to close the inflationary gap.

(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

(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.

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. Which of the following measures a recessionary gap?

Y2 - Y1

Over the past few decades in the United States, large federal budget deficits most often have been caused by:

a depressed economy.

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. (Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose actual real GDP in Arcadia is 500 billion arcs. This economy has:

a recessionary gap.

An automatic stabilizer that works when the economy contracts is:

a rise in government transfers as more people receive unemployment insurance benefits.

An inflationary gap occurs when:

actual output exceeds potential output.

Which of the following fiscal policies would make a budget surplus smaller or a budget deficit larger?

an increase in government purchases of goods and services

Which of the following is an expansionary fiscal policy?

an increase in unemployment benefits

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

Congress increases personal income tax rates to balance the budget. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

decrease; contractionary; decrease

Suppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

decrease; expansionary; increase

(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

If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should _____ taxes by _____ .

decrease; more than $25 billion