Chapter 16

If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by ________ to restore the economy to potential real GDP.

$250 billion

If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP.

$250 billion

Refer to Figure 16-1. Suppose the economy is in a recession and expansionary 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.

Refer to Figure 16-1. Suppose the economy is in 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. Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to E

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

B to A

Refer to Figure 16-1. Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers 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

C to B.

Refer to Figure 16-1. Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

C to D.

Fiscal policy is determined by

Congress and the president

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.

If the tax multiplier is -1.5 and a $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

Refer to Figure 16-3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president?

a decrease in income taxes

Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the price level is not held constant?

a decrease of less than $80 billion

The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of

automatic stabilizers.

The aggregate demand curve will shift to the right ________ the initial increase in government purchases.

by more than

The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the

decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods.

An increase in individual income taxes ________ disposable income, which ________ consumption spending.

decreases; decreases

The government purchases multiplier equals the change in ________ divided by the change in ________.

equilibrium real GDP; government purchases

The tax multiplier equals the change in ________ divided by the change in ________.

equilibrium real GDP; taxes

Fiscal policy refers to changes in

federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

An increase in government purchases will increase aggregate demand because

government expenditures are a component of aggregate demand.

Automatic stabilizers refer to

government spending and taxes that automatically increase or decrease along with the business cycle.

Refer to Figure 16-2. In the graph above, if the economy is at point A, an appropriate fiscal policy by Congress and the president would be to

increase government expenditures.

A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

increase; fall; rises

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes.

The tax multiplier

is negative.

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

lower; lower

Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect.

multiplier

Increases in government spending result in ________ in the short run, and permanent increases in government spending result in ________ in the long run.

partial crowding out; complete crowding out

The tax wedge is the difference between the

pretax and posttax returns to an economic activity.

Crowding out refers to a decline in ________ as a result of an increase in ________.

private expenditures; government purchases

Economists who believe the supply-side effects of tax cuts are small essentially believe that

tax cuts mainly affect aggregate demand.

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because

the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy.

Which of the following is an example of discretionary fiscal policy?

the tax cuts passed by Congress in 2001 to combat the recession

The federal government debt equals

the total value of U.S. Treasury bonds outstanding.

Refer to Figure 16-11. In the graph above, the shift from AD1 to AD2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B ________ $50 billion

would be greater than