Ch11 - Fiscal Policy

If the MPC equals 0.80, a $200 billion tax decrease will increase consumption in the first round by

$160 billion.

If the multiplier equals 2 and the AD shortfall is $6 million, the desired fiscal stimulus is

$3 million.

If the MPC for an economy is 0.90, a $4 billion increase in taxes will ultimately cause consumption to decrease by

$36 billion.

Refer to Figure 11.1. Assume aggregate demand is represented by AD1 and full employment output is $6.0 trillion. The equilibrium level of income is

$5.8 trillion.

To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.50, the government should increase spending by

$50 billion.

Refer to Figure 11.1. Assume aggregate demand is represented by AD1 and full-employment output is $6.0 trillion. The AD shortfall is equal to

$0.4 trillion.

Which of the two fiscal stimulus tools will ultimately have the same impact on aggregate spending?

$100 billion increase in transfer payments and $100 billion in tax cuts.

Refer to Figure 11.1. Assume aggregate demand is represented by AD1 and full-employment output is $6.0 trillion. The economy confronts a real GDP gap of

$.2 trillion.

If the MPC equals 0.75, a $100 billion transfer payment decrease will decrease consumption in the first round by

$75 billion.

Using Figure 11.1, which fiscal policy action would increase aggregate demand from AD1 to AD3?

A decrease in taxes.

Jack has an MPC of 0.82 and Jill has an MPC of 0.78. Ceteris paribus, if the government transfers income from people who behave like Jack to people who behave like Jill,

Aggregate demand will decrease.

A tax cut

Contains less fiscal stimulus than an increase in government spending of the same size.

The desired fiscal restraint is equal to

Excess AD divided by the multiplier.

The use of government taxes and spending to alter macroeconomic outcomes is known as

Fiscal policy.

A marginal propensity to save (MPS) of 0.25 means a $50 million tax cut ultimately

Increases spending by $150 million.

Suppose the government decides to increase taxes by $50 billion and to increase transfer payments by $50 billion. What effect would there be on aggregate demand?

No impact.

Disposable income refers to

Personal income after personal taxes.

Fiscal policy works primarily through

Shifts of the AD curve.

Which of the following gave the U.S. federal government the power to tax income? -The Sixteenth Amendment to the Constitution. -The Full Employment and Balanced Growth Act of 1978. -The Social Security Act. -The capital gains tax of the Bush administration.

The Sixteenth Amendment to the Constitution.

The inflationary GDP gap differs from the AD excess when

The aggregate supply curve slopes upward.

A tax cut has a smaller impact on aggregate demand than an increase in government purchases of the same size because

A portion of the tax cut is saved.

If aggregate demand increases by the amount of the recessionary GDP gap and aggregate supply is upward-sloping,

A recessionary GDP gap will still exist.

The general formula for computing the desired stimulus is

AD shortfall ÷ the multiplier.

According to Keynes, the level of economic activity is predominantly determined by the level of

Aggregate demand.

Which of the following would cause the level of income to change by the greatest amount, ceteris paribus? -An increase in Social Security payments of $10 billion. -A reduction in personal income taxes of $10 billion. -An increase in defense spending of $10 billion. -All of the other choices have equal impacts on the level of income.

An increase in defense spending of $10 billion.

Crowding out is caused by

An increase in government borrowing.

The balanced budget multiplier says that

An increase in government spending paid for by a tax increase of equal size shifts aggregate demand rightward.

Which of the following fiscal policies cause a decrease in aggregate expenditures? -An increase in transfer payments and an increase in government spending. -An increase in transfer payments and a decrease in taxes. -A decrease in taxes and an increase in government spending. -An increase in taxes and a decrease in government spending.

An increase in taxes and a decrease in government spending.

Assume the economy is at full employment and prices are reasonably stable. If the government wants to increase spending for public schools, which of the following policies will have the least inflationary impact?

An increase in taxes by an amount greater than the increase in spending.

The crowding out effect refers to a decrease in

Consumption or investment as a result of an increase in government borrowing.

The desired tax cut to close a GDP gap is given by

Desired fiscal stimulus ÷ MPC.

A tax cut intended to increase aggregate demand is an example of

Fiscal stimulus.

When there is excess aggregate demand in the economy,

Full-employment output is less than equilibrium output.

From a Keynesian perspective, the way out of recession is to

Get consumers to spend more on goods and services.

Ceteris paribus, if the AD shortfall equals $600 billion, then the federal government can close it by increasing

Government spending by less than $600 billion.

If the government purchases multiplier is 4 and a change in government spending leads to a $500 million decrease in aggregate demand, we can conclude that

Government spending decreased by $125 million.

Keynesians would recommend

Higher taxes when there is excess aggregate demand.

In a diagram of aggregate demand and supply curves, the AD shortfall is measured as the

Horizontal distance between the aggregate demand curve necessary for full employment and the aggregate demand curve that intersects AS at the equilibrium price.

Payments to individuals for which no current goods or services are exchanged are known as

Income transfers.

Assume the MPC is 0.75, taxes increase by $100 billion, and government spending increases by $100 billion. Aggregate demand will

Increase by $100 billion.

Assume the MPC is 0.75. To eliminate an AD shortfall of $200 billion, the government should

Increase spending by $50 billion.

Ceteris paribus, if income was transferred from individuals with a low MPC to those with a high MPC, aggregate demand would

Increase.

Which of the following is a fiscal policy tool used to stimulate the economy? -Lower interest rates. -Increased imports. -Reducing inefficient employment of resources. -Increased government purchases.

Increased government purchases.

Which of the following will most likely provide fiscal stimulus to the economy? -Increasing taxes. -Decreasing government spending on goods and services. -Increasing transfer payments. -Higher interest rates.

Increasing transfer payments.

Nearly half of the federal government's tax revenues come from

Individual income taxes.

The total change in aggregate spending generated by increased government spending depends on the

Marginal propensity to consume.

Which of the following is generally considered a desirable outcome of fiscal policy? -More jobs. -Higher unemployment rates. -A higher price level. -Greater deficits.

More jobs.

Refer to Figure 11.1. Assume aggregate demand is initially represented by AD1 and full-employment output is $6.0 trillion. If aggregate demand increases by the amount of the GDP gap, equilibrium will occur at

Point c.

Suppose economic conditions call for a tax increase but Congress does not implement this measure because an election is approaching. This is an example of which of the real-world problems associated with fiscal policy?

Pork barrel politics.

If the recessionary GDP gap is $500, then the proper fiscal stimulus when faced with an upward-sloping AS curve is to

Shift the AD curve rightward by more than $500.

Which of the following is the best choice to eliminate a recessionary gap if the desired fiscal stimulus is $10 billion and the aggregate demand shortfall is $100 billion, while the MPC is 0.90? -Tax hike of $11.11 billion. -Tax cut of $11.11 billion. -Tax hike of $10 billion. -Tax cut of $10 billion.

Tax cut of $11.11 billion.

Fiscal restraint is defined as

Tax hikes or spending cuts intended to reduce aggregate demand.

If the desired fiscal stimulus is $20 billion and the desired AD increase is $50 billion, we can conclude that

The MPC is 0.60.

If the desired fiscal restraint is $80 billion and the AD excess is $160 billion, we can conclude that

The MPS is 0.50.

Which of the following formulas is used to find the cumulative increase in AD from a particular fiscal stimulus? -Fiscal stimulus ÷ the multiplier. -Fiscal stimulus ÷ MPC. -The multiplier ×fiscal stimulus. -MPC ×fiscal stimulus.

The multiplier ×fiscal stimulus.

Which of the following is true when the government attempts to move the economy to full employment by increasing spending? -The desired stimulus should be set by the AD shortfall multiplied by the multiplier. -It must initially spend more than the GDP gap if the aggregate supply curve is upward-sloping. -The total change in spending includes both the new government spending and the subsequent increases in consumer spending. -The desired stimulus should be set by the multiplier divided by the AD shortfall.

The total change in spending includes both the new government spending and the subsequent increases in consumer spending.

The statement "balancing the budget on the backs of the poor" refers to

Transfer payment cuts in order to reduce government expenditures.

Which of the following is an income transfer? -Free medical care made available to the poor by a private physician. -Unemployment benefits paid to a factory worker who was laid off. -A new highway built by the federal government. -A gift of money from a parent to a child.

Unemployment benefits paid to a factory worker who was laid off.