Ch.16 HW

represent total government spending including​ goods, services, grants to state and local​ governments, and transfer payments.

Government expenditures

spending by the government on​ goods, services, and factors of production.

Government purchases

1) Since the​ 1950s, total government​ expenditures, as a percentage of​ GDP, have ________ and total government​ purchases, as a percentage of​ GDP, have ________. 2) The major cause of these trends is A. there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance. B. there has been a decrease in income tax rates for most households in the U.S. C. there has been a reduction in the nominal amount of government purchases on military as the U.S. does not engage in military conflicts. D. All of the above.

1) increased, decreased, 2)A

In The General Theory of​ Employment, Interest, and Money​, John Maynard Keynes wrote​ this: ​"If the Treasury were to fill old bottles with​ banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town​ rubbish, and leave it to private enterprise...to dig the notes up again... there need be no more unemployment​ and, with the help of the​ repercussions, the real income of the community...would probably become a good deal greater than it​ is." 1) In this​ statement, Keynes is discussing the important macroeconomic effect called the.. 2) By​ repercussions, Keynes means that an initial increase in autonomous expenditures will A. change production by an amount less than the initial increase in autonomous expenditures. B. change production by an amount just equal to the initial increase in autonomous expenditures. C. change production by an amount greater than the initial increase in autonomous expenditures. D. have no impact on production. 3) Keynes appears unconcerned if government spending is wasteful because A. it will still lead to an increase in production and employment. B. the resulting decrease in production will mean less in taxes that have to be paid. C. the repercussions will eliminate the part of the spending that is wasteful. D. None of the​ above; Keynes is concerned that the spending is wasteful.

1) multiplier effect, 2) C, 3) A

1) What is meant by crowding​ out? A. Crowding out is a decline in private expenditures as a result of increases in government purchases. B. Crowding out is an increase in private expenditures as a result of decreases in government purchases. C. Crowding out is an increase in private expenditures as a result of increases in government purchases. D. Crowding out is a decline in private expenditures as a result of decreases in government purchases. 2) Which of the following best describes the difference between crowding out in the short run and in the long​ run? A. In the short​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures. B. In the long​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the short​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures. C. In the short run and the long​ run, most economists believe that an increase in government purchases will result in complete crowding out of private expenditures. D. In the short run and the long​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand.

1)A, 2)A

1) Government spending and taxes that increase or decrease without any actions taken by the government are referred to as A. discretionary fiscal policy. B. automatic stabilizers. C. monetary policy. D. government expenditures. 2) Which of the following are examples of discretionary fiscal​ policy? ​(Check all that​ apply.) A. The government provides stimulus funds to repair roads and bridges to increase spending in the economy. B. Additional taxes are collected as the economy experiences an increase in income resulting from economic growth. C. The president and Congress reduce tax rates to increase the amount of investment spending. D. A state government borrows money to finance the building of a new bridge. E. The government spends more on the military to provide assistance to England after a natural disaster. F. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate.

1)B, 2)A,C,F

1) What is an expansionary fiscal​ policy? A. Expansionary fiscal policy includes increasing government spending and taxes to increase aggregate demand. B. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand. C. Expansionary fiscal policy includes decreasing government spending and taxes to increase aggregate demand. D. Expansionary fiscal policy includes decreasing government spending and increasing taxes to increase aggregate demand. 2) What is a contractionary fiscal​ policy? A. Contractionary fiscal policy includes increasing government spending and taxes to decrease aggregate demand. B. Contractionary fiscal policy includes decreasing government spending and taxes to decrease aggregate demand. C. Contractionary fiscal policy includes increasing government spending and decreasing taxes to decrease aggregate demand. D. Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.

1)B, 2)D

According to a 2017 Congressional Budget Office​ (CBO) report,​ "By 2047, 22 percent of the population will be age 65 or​ older, CBO​ anticipates, compared with 15 percent​ today." 1) The​ over-65 population is increasing so rapidly because A. modern medicine benefited this group more than others. B. this group is the healthiest. C. after​ WWII, there was a​ "baby boom," but after 1965 birthrates fell. D. infant mortality rose significantly after 1965. 2) The increase in the number of people age 65 or older will result in _________ in federal spending on Social Security and Medicare as a percentage of GDP. 3) If current projections of federal spending on Social Security and Medicare are​ accurate, policymakers are faced with the choice of A. significantly restraining spending on these programs​ and/or greatly increasing taxes on households and firms. B. significantly restraining spending on these programs​ and/or relying more on the Fed to increase the money supply. C. changing the budget rules so that some of these expenses are moved​ off-budget and/or greater reliance on the Fed to increase the money supply. D. changing the budget rules so that some of these expenses are moved​ off-budget and/or greatly increasing taxes on households and firms.

1)C, 2) an increase, 3)A

Economist Mark Thoma has​ written, "One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement. ... Automatic stabilizers bypass this difficulty by doing exactly what their name​ implies." 1) Automatic stabilizers are A. budgetary cuts that occur automatically at the end of the fiscal year if there is a deficit. B. changes in the money supply that occur automatically when money demand changes. C. government spending and taxes that automatically increase or decrease along with the business cycle. D. changes in business taxes that occur when the economy slows down. 2) Two examples of automatic stabilizers in the U.S. are A. social security payments and the proportional income tax system. B. unemployment insurance payments and the progressive income tax system. C. the proportional income tax system and student loan subsidies. D. social security payments and the regressive income tax system. 3) Automatic stabilizers can reduce the severity of a recession​ because, during a​ recession, A. social security payments and student loan subsidies​ rise, providing more spending ability to push the economy back to full employment. B. unemployment payments rise and tax collections​ fall, providing more spending ability to push the economy back to full employment. C. social security payments rise and tax collections​ fall, providing more spending ability to push the economy back to full employment. D. student loan subsidies rise and tax collections​ fall, providing more spending ability to push the economy back to full employment.

1)C, 2)B, 3)B

1) What is fiscal​ policy? A. Fiscal policy can be described as changes in interest rates to achieve macroeconomic policy objectives. B. Fiscal policy can be described as changes in interest rates and taxes to achieve macroeconomic policy objectives. C. Fiscal policy can be described as changes in government spending and interest rates to achieve macroeconomic policy objectives. D. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives. 2) Who is responsible for fiscal​ policy? A. Fiscal policy is controlled by market forces. B. The federal government controls fiscal policy. C. The Federal Reserve controls fiscal policy. D. The federal government and the Federal Reserve jointly control fiscal policy.

1)D, 2)B

In what ways does the federal budget serve as an automatic stabilizer for the​ economy? A. During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these occur automatically and both effects help to stabilize aggregate demand. B. During a​ recession, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. During an​ expansion, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. Both of these occur automatically and both effects help to stabilize aggregate demand. C. During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these require government action to stabilize aggregate demand. D. During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits rise. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits fall. Both of these occur automatically and both effects help to stabilize aggregate demand.

A

Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called A. automatic stabilizers. B. transfer payments. C. monetary policy. D. discretionary fiscal policy.

A

Suppose that at the same time Congress and the president pursue an expansionary fiscal​ policy, the Federal Reserve pursues an expansionary monetary policy. How might an expansionary monetary policy affect the extent of crowding out in the short​ run? A. An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out. B. An expansionary monetary policy would have no effect on the extent of crowding out. C. An expansionary monetary policy would only affect the extent of crowding out in the long run. D. An expansionary monetary policy would increase interest rates and thus increase the extent of crowding out.

A

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy? A. Yes. Fiscal policy refers to changes in government spending and taxes. B. No. The increase in defense spending after that date was designed to achieve homeland security objectives. C. Yes. Increases in defense spending are designed to achieve macroeconomic policy objectives. D. No. Fiscal policy refers to changes in interest rates and the money supply.

B

Another infrastructure project in northern California funded in part by ARRA funds involved expanding the Caldecott Tunnel between the cities of Oakland and Orinda. A spokesperson for the California state agency in charge of the project mentioned that the Caldecott tunnel project would have a​ "ripple effect" on employment. The ripple effect meant that A. other​ non-construction industries would also want to share the​ government's stimulus money. B. the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers. C.the job creation would be restricted to the construction industry only as more workers would be hired by other construction companies. D. the income earned by the Caldecott tunnel project workers would trickle down to those who would be still unemployed.

B

Which can be changed more​ quickly: monetary policy or fiscal​ policy? A. Fiscal policy can be changed more quickly than monetary policy. Monetary policy has much longer delays due to the larger number of legislators involved. B. Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy. C. Monetary policy can be changed more quickly than fiscal policy. Fiscal policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy. D. Fiscal policy can be changed more quickly than monetary policy. Fiscal policy has much shorter delays due to the smaller number of legislators involved.

B

In​ 2009, Congress and the president enacted​ "cash for​ clunkers" legislation that paid people buying new cars up to​ $4,500 if they traded in an​ older, low​ gas-mileage car. Was this piece of legislation an example of fiscal​ policy? A. ​No, because the effect of the spending program was to increase the gas mileage of cars currently on the road. B. No, because the program did not have any effect on the national economy. C. Yes, because the primary goal of the spending program was to stimulate the national economy. D. ​Yes, because any government spending program​ is, by​ definition, a fiscal policy.

C

The federal government collected less in total individual income taxes in 1983 than in 1982. Can we conclude that Congress and the president cut individual income tax rates in​ 1983? A. Yes. Since the same number of people would be paying​ taxes, if tax collection was​ down, the tax rate must have been cut. B. No. The tax rates might have stayed the​ same, but the process of collection may have changed. C. Yes. Since the same amount of income was​ earned, if tax collection was​ down, the tax rate must have been cut. D. No. It could be that the economy​ contracted, so less income was earned and less was paid in tax.

D

Why do few economists argue that it would be a good idea to balance the federal budget every​ year? A. To keep a balanced budget during an​ expansion, taxes would have to decrease and government expenditures would have to​ increase, which would increase aggregate demand and decrease inflation. B. To keep a balanced budget during a​ recession, taxes would have to decrease and government expenditures would have to​ increase, which would further reduce aggregate demand and deepen the recession. C. To keep a balanced budget during an​ expansion, taxes would have to increase and government expenditures would have to​ decrease, which would increase aggregate demand and lead to inflation. D. To keep a balanced budget during a​ recession, taxes would have to increase and government expenditures would have to​ decrease, which would further reduce aggregate demand and deepen the recession.

D

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending? A. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to a decrease in aggregate demand and national​ income, which will lead to an increase in induced spending. B. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to a decrease in aggregate demand and national​ income, which will lead to a decrease in induced spending. C. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to a decrease in induced spending. D. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending

D

Identify each of the following​ as: ​(i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy. a. The corporate income tax rate is increased. This is b. Defense spending is increased. This is c. The Federal Reserve lowers the target for the federal funds rate. This is d. Families are allowed to deduct all their expenses for daycare from their federal income taxes. This is e. The individual income tax rate is decreased. This is

a. part of a contractionary fiscal policy b. not part of fiscal policy c. not part of fiscal policy d. not part of fiscal policy e. part of an expansionary fiscal policy