Ch. 24 Fiscal Policy Macro

Increase; consumption; investment

A tax _ on consumers will reduce households' disposable incomes and thus their purchases of _ goods and services, while higher business taxes will reduce _ purchases.

Are more likely to increase tax revenues the higher tax rates are to start with

According to the Laffer curve, decreasing tax rates? A. On income will always increase tax revenues B. On income will always decrease tax revenues C. Are more likely to increase tax revenues the higher tax rates are to start with D. Are more likely to increase tax revenues the lower tax rates are to start with

The demand for money will increase, driving interest rates up

According to the crowding-out effect, if the federal government borrows to finance deficit spending, A. The demand for money will decrease, driving the interest rates down B. The demand for money will increase, driving the interest rates up C. The supply of money will increase, driving interest rates up D. The supply of money will decrease, driving the interest rates down

Decrease AD

An increase in taxes combined with a decrease in government purchases would A. Increase AD B. Decrease AD C. Leave AD unchanged D. Have an indeterminate effect on AD

Reduce the problems caused by lags, using fiscal policy as a stabilization tool

Automatic stabilizers?

Less; offsets

Because incomes, earnings, and profits all fall during a recession, the government collects _ in taxes. The reduced tax burden partially _ any contractionary fall in aggregate demand.

Time lags

Because of the _ _ in implementing fiscal policy, a fiscal policy designed to deal with a contraction economy may actually take effect during a period of economic expansion.

Lessened

Big increases and big decreases in GDP are both _ by automatic changes in tax receipts.

Disposable; consumption

By changing the tax rates, the federal government can alter the amount of _ income of households and thereby bring about changes in _ purchases.

Automatic stabilizers

Changes in government transfer payments or tax collections that automatically tend to counter business cycle fluctuations are called _.

Lower; lower

Contractionary fiscal policy will result in a(n) _ price level and _ employment in the short run.

Contractionary

Deficit reduction is a(n) _ fiscal policy in the short run.

Increase; falls

During a recession, government transfer payments automatically _ and tax revenue automatically _.

Do all of the above

Higher budget deficits would tend to? A. Raise interest rates B. Reduce investment C. Reduce the growth rate of the capital stock D. Do all the above

War

Historically, the larger budget deficits have tended to be in _ years.

It issues debt to government agencies, private institutions, and private investigaters

How does the government finance budget deficits?

Greater

If the demand-side stimulus from reduced tax rates is _ than the supply-side effects, the result will be a higher price level and a greater level of real output.

Decrease taxes and increase government purchases

If the economy was in a recessionary gap, in order to return to RGDPnr, the government could A. Decrease taxes and increase government purchases B. Increase taxes and increase government purchases C. Decrease taxes and decrease government purchases D. Decrease taxes and increase government purchases

Surplus

If the federal government is running a(n) _, the federal debt would be getting smaller.

Do either A or C

If the government wanted to offset the effect of a boom in consumer and investor confidence on AD, it might A. Decrease government purchases B. Decreases taxes C. Increase taxes D. Do either A or C

Any of the above

If the government wanted to use fiscal policy to increase aggregate demand, which of the following might be an appropriate policy action? A. Decrease taxes B. Increase government purchases of goods and services C. Reduce the supply of money D. Any of the above

Reduce; increase

If the government wants to use fiscal policy to help "cool off" the economy when it has overheated and inflation has become a serious problem, it will tend to _ government purchases and/or _ taxes.

Reduce; increase

If the government wishes to dampen a boom in the economy, it will _ its purchases of goods and services, _ taxes, or use some combination of these approaches

3

If the marginal propensity to consume is two-thirds, the multiplier is A. 30 B. 66 C. 1.5 D. 3

Smaller

If the marginal propensity to consumer were smaller, a given increase in government purchases would have a(n) _ effect on consumption purchases.

Lower

If unemployed resources are put to work by government spending, the opportunity cost of expanded public activity would be _ than otherwise.

0.3

If your MPC were equal to .7, your MPS would equal _.

The supply side view

Lower marginal tax rates stimulate people to work, save, and invest, resulting in more output and a larger tax base. This statement most closely reflects which of the following views? A. The Keynesian view B. The multiplier view C. The aggregate demand theory D. The supply-side view

All of the above are correct

One of the real-world complexities of. Countercyclical fiscal policy is that? A. Fiscal policy is based on forecasts, which are not foolproof B. A lag occurs between a change in fiscal policy and its effect C. How much of the multiplier effect will take place in a given amount of time is uncertain D. All of the above are correct

Do all the above

Other things being constant, an increase in marginal tax rates will A. Decrease the supply of labor and reduce its productive efficiency B. Decrease the supply of capital and decrease its productive efficiency C. Encourage individuals to buy goods that are tax deductible instead of those that are more desired but nondeductible D. Do all the above

Reduce

Savings and money spend on imported goods will each _ the size of the multiplier.

Equal to

Starting at a full-employment equilibrium, once the economy has returned to its long-run equilibrium after an increase in government purchases, employment will be _ full employment.

Price

Starting at full-employment equilibrium, the only long-term effect of an increase in aggregate demand will be an increase in the _ level.

Less; less; less

Supply-side economists believe that individuals will save _, work _, and provide _ capital when taxes, government transfer payments, and regulations are too burdensome on productive activities.

Laffer

The _ curve shows that high tax rates could conceivably reduce work incentives to the point that government revenues are lower at high marginal tax rates than they would be at somewhat lower rates.

Multiplier

The _ effect explains why, when an initial increase in purchases of goods and services occurs, the ultimate increase in total purchases will tend to be greater than the initial increase.

Crowding-out

The _ effect refers to the theory that when the government borrows money to finance a deficit, it drives interest rates up, choking off some private spending on goods and services.

Marginal propensity to consume

The additional consumption purchases made as a portion of one's additional income is measured by the _.

1/(1-MPC)

The expenditure multiplier is A. 1/MPC B. 1/(1-MPC) C. (1-MPC)/1 D. 1/(change)MPC

Less

The extent of the multiplier effect visible within a short time period will be _ than the total effect indicated by the multiplier formula.

Aggregate demand will not change

The federal government buys $20 million worth of computers from Apple. If the MPC is 0.60, what will be the impact on aggregate demand, other things being equal? A. Aggregate demand will increase $12 mil B. Aggregate demand will increase 13.33 mil C. Aggregate demand will increase $20 mil D. Aggregate demand will increase $50 mil E. Aggregate demand will not change

Both A and C

The government sometimes uses fiscal policy to: A. Control the money supply B. Stimulate the economy during a contraction C. To curb a potentially inflationary expansion D. Both A and C

Small

The larger the crowding-out effect, the _ the actual effect of a given change in fiscal policy.

Larger

The larger the marginal propensity to consumer, the _ the multiplier effect.

Increase; higher

The monetary authorities could _ the money supply to offset the _ interest rates due to the crowding-out effect of expansionary fiscal policy.

Tax

The most important automatic stabilizer is the _ system.

Expenditures; income

The multiplier effect is based on the fact that _ by one person is (are) _ by another. A. Income; income B. Expenditures; expenditures C. Expenditures; income D. Income; expenditures

Greater

The multiplier effect of an increase in government purchases implies that the increase in aggregate demand will tend to be _ than the initial fiscal stimulus, other things being equal.

Consumption

The multiplier effect triggered by an increase in spending arises because of the additional _ spending that it leads to.

Increase; increase

The result of an expansionary fiscal policy in the short run would be a(n) _ in the price level and a(n) in RGDP.

Inflationary boom; recession

Themed correctly, contractionary fiscal policy could correct a(n) _; time incorrectly it could cause a(n) _.

Government purchases and taxes; demand

Traditionally, government has used _ to influence _ side of the economy.

Inherit higher taxes

When government debt is financed internally, future generations?

Consumption

When people's incomes rise because of increased government purchases of goods and services collectively people will spend a substantial part of the audio talk income on additional _ purchases.

Stays the same; stays the same

When taxes are increased, disposable income _, and hence consumption _ A. Increases; increase B. Increases; decreases C. Decreases; increases D. Decreases; decreases E. Stays the same; stays the same

AD shifts right, but by less than the simple multiplier analysis would imply

When the crowding-out effect of an increase in government purchases is included in the analysis? A. AD shifts left B. AD does not change C. AD shifts right, but by more than the simple multiplier analysis would imply D. AD shifts right, but by less than the simple multiplier analysis would imply

Increases; up

When the government borrows money to finance a deficit, it _ the overall demand for money in the money market, driving interest rates _.

Incomes

When the government purchases additional goods and services, not only does it add to the total demand for goods and services directly, but the purchases also add to people's _.

Increase; increase

When the government wishes to stimulate the economy by increasing aggregate demand, it will _ government purchases of goods and services, _ taxes, or use some combination of these approaches.

All of the above statements are true.

Which of the following statements are true? A. The crowding-out effect will tend to reduce the magnitude of the effects of increases in government purchases. B. The crowding-out effect implies that expansionary fiscal policy will tend to reduce private purchases of interest-sensitive goods. C. The crowding-out effect can occur as a result of direct effects. D. The crowding-out effect can occurs as a result of financing a deficit that drives up real interest rates and crowds out private consumption and investment spending. E. All of the above statements are true.

Smaller; savings; tax

With each additional round of the multiplier process, the added income generated and the resulting consumer purchases get _ because some of each round's increase in income goes to _ and _ payments.

Increasing

_ a federal budget deficit could be an appropriate fiscal policy if the economy were in a recession.

The expenditure multiplier

_ is equal to 1/(1-MPC)

Fiscal policy

_ is the use of government purchases and/or taxes to alter real GDP and price levels