Ch. 33 Fiscal Policy, Deficits, and Debt

What may offset the crowding-out effect of deficit spending?

Improved prospects that firms might expect from a fiscal stimulus

Which of the following is a problem that may arise in connection with fiscal policy?

Recognition lag

Economists who support the idea that increased spending during recession and increased taxes in times of demand-pull inflation are necessary, usually are in favor of

a large government

The difference between a progressive, proportional and regressive tax system is the way the __________ tax rate responds to change in GDP.

average

The more progressive the tax system, the greater the economy's:

built-in stability

Government can use tax increases to reduce ___________ spending.

consumption

Restrictive fiscal policy is also known as ______________ fiscal policy.

contractionary

When demand-pull inflation occurs, what kind of fiscal policy may help control it?

contractionary

Fiscal The manipulation of taxes and federal spending in order to stimulate the economy or reduce inflation is known as expansionary or contractionary ____________ policy.

fiscal

Projected deficits and surpluses are subject to large and frequent changes as government altars it's _________ policy and GDP growth accelerates or slows.

fiscal

The ________ effect for inflation occurs as an increase in the price level due to increases in aggregate demand, but when aggregate demand decreases, product prices, wage rates, and per-unit production costs are inflexible downward.

ratchet

A decrease in aggregate demand reduces

real GDP

Increases in aggregate demand that expand real output beyond the full-employment level tend to move the price level upward. Declines in aggregate demand do not seem to push the price level downward. This is known as what effect?

ratchet

An economy producing below potential output is considered to be operating in a ____________ gap.

recessionary

Economists who believe there are many unmet social and infrastructure needs in the economy usually recommend that government spending be increased during what type of economic period?

recessionary

Consumers who believe a tax increase is only temporary may _________ their savings to pay the tax while maintaining their present consumption.

reduce

The government can ________ taxes to shift the aggregate demand curve rightward.

reduce

To positively stimulate an economy using fiscal policy, government spending should __________, and taxes should _________.

rise; fall

An increase in taxes of $4 billion in an economy with a MPC of 0.75 will initially reduce _________ by $1 billion

savings

If government disregards or underestimates the multiplier effect, contractionary fiscal policy could cause aggregate demand to:

shift leftward further than potential output

When the government uses contractionary fiscal policy to correct demand-pull inflation, what prevents the price level from returning to it's former level?

the ratchet effect

What automatically happens to tax receipts when GDP declines?

they decline

Increases in which of the following will always accompany a negative GDP gap?

unemployment

Virtually any tax will yield more tax revenue as _________ rises.

GDP

Taxes restrain the economic expansion because they reduce what?

Household and business spending

The average tax rate remains constant as GDP rises in what kind of tax system?

Proportional

Built-in stability constitutes which of the following policies?

- "automatic" budgetary policy - "passive" budgetary policy - Non discretionary budgetary policy

Which of the following are fiscal tools that a government may use to eliminate an inflationary GDP gap?

- decrease government spending - raise taxes - a combination of both reduced government spending and higher taxes

Why does the crowding-out effect focus it's attention on investment?

Because investment is the most volatile component of GDP

Why would a tax reduction thought to be temporary not increase present consumption spending and aggregate demand as much as expected?

Because people are preparing for the expected higher tax rate in the future.

Why is the crowding-out effect less likely to be a problem during a recession?

Because slow sales do not encourage businesses to invest

Why does the recognition lag occur?

Because the economy does not move smoothly through the business cycle.

Automatic changes in tax revenues over the course of the business cycle creates what?

Built-in stability

___________ can only dampen, not eliminate swings in real GDP.

Built-in stabilizers

Discretionary policy consists of deliberate changes in government spending and taxation designed to achieve full employment, control inflation, and encourage economic growth

Fiscal

A declining _____ leads to a tax receipt decline and moves the government's budget from surplus toward deficit.

GDP

In the US tax system, net tax revenues vary directly with:

GDP

Tax revenues automatically rise and the budget moves from deficit toward surplus as the economy moves toward a higher:

GDP

What type of policy do economists generally agree is the best month-to-month stabilization tool for the US economy?

Monetary

Personal income taxes have progressive rates and generate what kind of increases in tax revenues as GDP expands?

More-than-proportionate

_________ taxes are tax revenues minus transfers and subsidies.

Net

How do transfer payments behave in relation to tax revenues as the economy goes through a business cycle?

Opposite (Recall that when there is economic growth, tax revenues increase and there is less of a need for transfer payments such as unemployment compensation)

______________ considerations may outweigh economic considerations in the formulation of fiscal policy.

Political

The average tax rate rises with GDP in what kind of tax system?

Progressive

Which of the following is an example of a built-in stabilizer?

The U.S. tax system

When tax revenues exceed government spending, it is called

a budget surplus

Stopping inflation is a matter of halting the rise of the price level, not trying to lower it to the previous level.

True

True or false: The ratchet effect describes that the price level can remain stuck at it's old level even when aggregate demand declines.

True

A __________ __________ budget is used to assess the discretionary fiscal policy and determine whether it is expansionary, contractionary, or neutral.

cyclically adjusted

Government may choose to combine spending decreases and tax increases in order to _________ aggregate demand and curb inflation.

decrease

When GDP falls during a recession and tax revenue automatically __________ government spending increases and cushions the economic contraction.

decrease

During a recession, the government can _______ taxes to increase consumption and shift the aggregate demand curve to the ________.

decrease, right

A budget ________ is government spending in excess of tax revenues.

deficit

If the economy starts out with a balanced Federal budget, a subsequent expansionary fiscal policy will create a budget ___________.

deficit

An economy's potential output is also known as:

full-employment output

Over the course of the business cycle, _________ change automatically in ways that stabilize the economy.

government tax revenues

State and local government are similar to households and private businesses in that the _________ expenditures during prosperity and ________ them during recession.

increase; cut

An inflationary GDP gap will cause further ____________ because input prices rise in the long run in order to meet the increase in output prices.

inflation

The up-sloping aggregate supply curve means that rightward shifts of aggregate demand result more in demand-pull ___________ than in increased output.

inflation

When the government borrows money and the money supply is held constant, overall demand for money increases, as does the interest rate. Some private __________ business may be choked off as the interest rate rises and this is an example of the crowding-out effect.

investment

To induce an increase in consumption through a tax-cut, the smaller the MPC is, the ________ the tax-cut needs to be:

larger

To have the same impact on aggregate demand as a $100 billion increase in government spending, a tax-cut would need to be:

larger than $100 billion

An ___________ lag occurs between the time fiscal action is taken and the time that action affects output, employment, and the price level.

operational

The enactment of discretionary fiscal policy may be slowed because it is conducted in a __________ arena.

political

In a _____________ tax system, the average tax rates falls as GDP rises.

progressive

A built-in ____________ is anything that increases the government's budget deficit (or reduces it's budget surplus) during a recession and increases it's budget surplus (or reduces it's budget deficit) during an expansion without requiring explicit action by policymakers.

stabilizer

When the economy faces demand-pull inflation, fiscal policy should move towards a government budget

surplus

The built-in stabilizers of an economy depends on the responsiveness of _______ revenues to changes in GDP

tax

The preference for increasing or decreasing either government spending or taxes _______ to eliminate recession or inflation depends on one's view as to whether government is too large or too small.

taxes

Which of the following is a potential flaw of fiscal policy?

the crowding-out effect

Government spending is decreased by $5 billion and the resulting decline of aggregate demand is $20 billion. This is due to:

the multiplier

The aggregate demand curve shifts by an amount greater than an initial change in government spending. This is caused by

the multiplier effect