Chapter 16

The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of

automatic stabilizers.

The crowding out effect will be greater the

more sensitive investment is to changes in interest rates.

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

multiplier

Which of the following would not be considered an automatic stabilizer?

legislation increasing funding for job retraining passed during a recession

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

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

sometimes by more than and other times by less than

The problem causing most recessions is too little

spending

If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

taxes.

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.

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 would be classified as fiscal policy?

The federal government cuts taxes to stimulate the economy.

Which of the following is considered contractionary fiscal policy?

Congress increases the income tax rate.

Fiscal policy is determined by

Congress and the president.

Which of the following would be most likely to induce Congress and the president to conduct expansionary fiscal policy? A significant

decrease in investment spending.

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.

From an initial long-run equilibrium, if aggregate demand grows more slowly than long-run and short-run aggregate supply, then Congress and the president would most likely

decrease taxes.

Following a decrease in government spending, as the price level falls we would expect the level of interest rates to ________ and investment to ________.

decrease; increase

Decreasing government spending ________ the price level and ________ equilibrium real GDP

decreases; decreases

Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________.

discretionary fiscal policy; automatic stabilizers

Which of the following is an objective of fiscal policy?

high rates of economic growth

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes.

if government expenditures increase, then in the long-run

the interest rate increases, consumption declines, and investment declines.