Ch 16 Review

If the tax multiplier is -1.5 and $200 billion tax increase is implemented, what is the change in GDP , holding everything else constant? (Assume the price level stays constant)

A $300 billion decrease in GDP

16-1. Suppose the economy is in a recession and expasionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

16-1. Suppose the economy is in the short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

Refer to Figure 16-1. An increase in taxes would be depicted as a movement from (blank), using the static AD-AS model in the figure above

B to A

16-1. Suppose the economy is in a short0run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using static AD-AS model in the figure above, this would be depicted as a movement from

C to B

16-1. Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a move from (blank) using the static AD-AS mode

C to B

Fiscal policy is determined by

Congress and the president

Which of the following is considered contractionary fiscal policy

Congress increases the income tax rate

Suppose congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP?

Real equilibrium GDP will rise

Which of the following would be classified as fiscal policy

The federal government cuts taxes to stimulate the economy

If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy

an increase in taxes

Tax cuts on business income increase aggregate demand by increasing

business investment spending

The aggregate demand curve will shift to the left (blank) the initial decrease in government purchases

by more than

Expansionary fiscal policy

can be effective in the short run

The government purchases multiplier equals change in (blank) divided by the change in (blank)

equilibrium real GDP; government purchases

The tax multiplier equals the change in (blank) divided by the change in (blank)

equilibrium real GDP; taxes

Fiscal policy refers to

federal taxes and purchases that are intended to achieve macroeconomics policy objectives

An increase in government purchases will increase aggregate demand because

government expenditures are a component of aggregate demand

If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

government purchases

Congress and the president carry out fiscal policy through changes in

government purchases and taxes

Which of the following is an objective of fiscal policy

high rates of economic growth

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be (blank) and real GDP to be (blank)

higher;higher

Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy?

increase in inflation

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes

The multiplier effect refers to the series of

induced increases in consumption spending that result from an initial increase in autonomous expenditures

Which of the following would NOT be considered an automatic stabilizer

legislation increasing funding for job retraining passed during a recession

Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to potential GDP, Congress should

lower government purchases by an amount less than $200 billion

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be (blank) and real GDP to be (blank)

lower;lower

Crowding out refers to a decline in (blank) as a result of an increase in (blank)

private expenditures; government purchases

Figure 6-4. In the graph above, the shift AD 1 to AD 2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B (blank) $50 billion

would be greater than

Tax cuts on business income (blank) aggregate

would increase