ECON EXAM 2 CHAPTER 16

If the government cuts taxes in order to increase aggregate​ demand, the action is called A. a procyclical policy. B. a discretionary monetary policy. C. an automatic stabilizer. D. a discretionary fiscal policy.

A DISCRETIONARY FISCAL POLICY

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. An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out.

Does government spending ever reduce private​ spending? A. ​Yes, due to crowding out. B. ​No, due to crowding out. C. ​No, they are unrelated. D. ​Yes, due to reduced interest rates.

A. ​Yes, due to crowding out.

If the​ short-run aggregate supply curve​ (SRAS) were a horizontal​ line, what would be the impact on the size of the government purchases and tax multipliers LOADING...​? A. The impact of the multiplier would be impossible to determine if the SRAS curve is horizontal. B. The impact of the multiplier would be larger if the SRAS curve is horizontal. C. The impact of the multiplier would be smaller if the SRAS curve is horizontal. D. The impact of the multiplier would not be changed if the SRAS curve is horizontal.

B. The impact of the multiplier would be larger if the SRAS curve is horizontal.

When actual GDP is below potential GDP the budget deficit increases because​ of: A. a decrease in transfer payments and a decrease in tax revenues. B. an increase in transfer payments and a decrease in tax revenues. C. an decrease in transfer payments and an increase in tax revenues. D. an increase in transfer payments and an increase in tax revenues.

B. an increase in transfer payments and a decrease in tax revenues.

The major cause of these trends is A. there has been a reduction in the nominal amount of government purchases on military as the U.S. does not engage in military conflicts. B. there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance. C. there has been a decrease in income tax rates for most households in the U.S. D. All of the above.

B. there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance.

What is fiscal​ policy? A. Fiscal policy can be described as changes in interest rates and taxes to achieve macroeconomic policy objectives. B. Fiscal policy can be described as changes in interest rates to achieve macroeconomic policy objectives. C. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives. D. Fiscal policy can be described as changes in government spending and interest rates to achieve macroeconomic policy objectives.

C. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.

If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes? A. In this​ case, Congress and the president should enact policies that decrease government spending and decrease taxes. B. In this​ case, Congress and the president should enact policies that increase government spending and increase taxes. C. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes. D. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

C. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes.

Increased government debt can lead to higher interest rates​ and, as a​ result, crowding out of private investment spending. In terms of borrowing​ (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the​ economy? A. ​Debt-spending on education. B. ​Debt-spending on research and development. C. ​Debt-spending on highways and ports. D. All of the above.

D. ALL OF THE ABOVE

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.

D. Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.

Which of the following best describes the difference between crowding out in the short run and in the long​ run? A. 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. B. 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. C. 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. D. 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.

D. 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.

Why might cutting government spending as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing​ inflation? A. The government has more concentrated power than the Fed. B. The legislative process works quickly. C. The economy may have already slowed. D. The legislative process experiences longer delays than monetary policy.

D. The legislative process experiences longer delays than monetary policy.

President Trump was assuming that in​ 2017, the economy was A. in a severe recession and needed a job boost. B. at full employment. C. growing enough that the budget deficit would disappear. D. able to create more jobs and expand without increasing the inflation rate.

D. able to create more jobs and expand without increasing the inflation rate.

The multiplier effect is only a consideration for increases in government purchases.

FALSE

____________are spending by the government on​ goods, services, and factors of production. ______________represent total government spending including​ goods, services, grants to state and local​ governments, and transfer payments. Since the​ 1950s, total government​ expenditures, as a percentage of​ GDP, have __________ and total government​ purchases, as a percentage of​ GDP, have ___________ .

GOVERNMENT PURCHASES GOVERNMENT EXPENDITURES INCREASED DECREASED

When is it considered​ "good policy" for the government to run a budget​ deficit? A. When borrowing is used to pay for social insurance programs. B. When borrowing is used for current expenses. C. When borrowing is used for​ long-lived capital goods. D. All of the above.

WHEN BORROWING IS USED FOR LONG-LIVIED CAPITAL GOODS

In the long​ run, government tax policy can affect private investment which impacts the production function and factors of production. In other​ words, aggregate supply may be impacted by different types of taxes the government can use. Which of the following is not true in terms of potential long run impacts of tax​ policies? A. A tax rebate given one year will cause people to have more money and therefore they will spend more which will cause an increase in aggregate supply. B. Taxes on dividends for individuals are​ eliminated, which increases the return of investing for shareholders and thus creates more investment and an increase in aggregate supply. C. A reduction in individual income tax rates will increase the incentives for starting new businesses and aggregate supply will increase. D. The government decides to reduce the corporate income tax​ rate, thereby, increasing the returns to firms for investment which creates more investment and increases aggregate supply. E. All of the above are true statements.

A. A tax rebate given one year will cause people to have more money and therefore they will spend more which will cause an increase in aggregate supply.

What is an expansionary fiscal​ policy? A. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand. B. Expansionary fiscal policy includes decreasing government spending and taxes to increase aggregate demand. C. Expansionary fiscal policy includes increasing government spending and taxes to increase aggregate demand. D. Expansionary fiscal policy includes decreasing government spending and increasing taxes to increase aggregate demand.

A. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.

What is the cyclically adjusted budget deficit or​ surplus? A. The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal​ government's budget if the economy were at potential GDP. B. The cyclically adjusted budget deficit or surplus requires the federal budget to always be in​ balance, therefore avoiding a deficit or surplus. C. The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal​ government's budget if the economy were below potential GDP. D. The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal​ government's budget if the economy were above potential GDP.

A. The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal​ government's budget if the economy were at potential GDP.

Who is responsible for fiscal​ policy? A. The federal government controls fiscal policy. B. The Federal Reserve controls fiscal policy. C. The federal government and the Federal Reserve jointly control fiscal policy. D. Fiscal policy is controlled by market forces.

A. The federal government controls fiscal policy.

As a result of crowding out LOADING... in the short​ run, the effect on real GDP of an increase in government spending is often A. less than the increase in government spending. B. more than the increase in government spending. C. equal to the increase in government spending. D. unrelated to the increase in government spending.

A. less than the increase in government spending.

Changes in taxes and spending that happen without actions by the government are called A. transfer payments. B. autonomous fiscal expenditures. C. automatic stabilizers. D. discretionary fiscal policy changes.

AUTOMATIC STABILIZERS

Suppose that the economy is currently at potential​ GDP, and the federal budget is balanced. If the economy moves into​ recession, what will happen to the federal​ budget? A. If the budget is balanced at potential GDP and the economy moves into​ recession, then there will be a budget deficit as government expenditures decrease and tax revenues increase. B. If the budget is balanced at potential GDP and the economy moves into​ recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease. C. If the budget is balanced at potential GDP and the economy moves into​ recession, then the budget will remain balanced as government expenditure increases and tax revenue decreases will exactly offset each other. D. If the budget is balanced at potential GDP and the economy moves into​ recession, then the budget will remain balanced as government expenditure decreases and tax revenue decreases will exactly offset each other.

B. If the budget is balanced at potential GDP and the economy moves into​ recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.

What changes should they make if they decide a contractionary fiscal policy is​ necessary? A. In this​ case, Congress and the president should enact policies that decrease government spending and decrease taxes. B. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes. C. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes. D. In this​ case, Congress and the president should enact policies that increase government spending and increase taxes.

B. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

What is meant by crowding​ out? A. Crowding out is an increase in private expenditures as a result of decreases in government purchases. B. Crowding out is an increase in private expenditures as a result of increases in government purchases. C. Crowding out is a decline 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.

C. Crowding out is a decline in private expenditures as a result of increases in government purchases.

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. Fiscal policy can be changed more quickly than monetary policy. Fiscal policy has much shorter delays due to the smaller number of legislators involved. C. 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. D. 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.

C. 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.

The federal​ government's day-to-day activities include running federal agencies like the Environmental Protection​ Agency, the​ FBI, the National Park​ Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up A. about 85 percent of federal government expenditures. B. about 45 percent of federal government expenditures. C. less than 10 percent of federal government expenditures. D. less than 1 percent of federal government expenditures.

C. less than 10 percent of federal government expenditures.

Which of the following are categories of federal government​ expenditures? A. grants to state and local governments B. transfer payments C. interest on the national debt D. All of the above.

D. ALL OF THE ABOVE

Which of the following is not a correct comparison between an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply​ model? A. The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static. B. If the economy is below full​ employment, expansionary fiscal policy will cause an increase in the price level in both models. C. In the dynamic​ model, expansionary policy would be used when demand does not grow​ sufficiently; in the basic​ model, expansionary policy would be used when demand falls. D. All of the above are correct statements about the two models. E. None of the above are correct statements about the two models.

D. All of the above are correct statements about the two models.

The federal government would not want to increase its​ spending, even if the result were to increase real GDP and employment in the short​ run, if A. tax receipts are falling. B. productivity is falling. C. it would result in deflation. D. it would lead to a greater federal deficit and an increase in the national debt.

D. it would lead to a greater federal deficit and an increase in the national debt.

In​ 2017, in proposing a​ $1 trillion increase in government spending on​ infrastructure, President Trump argued that the spending would increase total employment in the United States. ​Source: Ted Mann and Michael C.​ Bender, "President Trump to Launch Push for Infrastructure​ Investment," Wall Street Journal​, June​ 4, 2017. In the short​ run, increases in federal spending will increase real GDP and employment if A. the economy is experiencing inflation. B. wages and prices do not change. C. the price level remains stable. D. the economy is producing at less than its potential output and has some cyclical unemployment. This is the correct answer.

D. the economy is producing at less than its potential output and has some cyclical unemployment. This is the correct answer.

When the economy is experiencing a recession automatic stabilizers will​ cause: A. transfer payments and tax revenues to be unaffected. B. transfer payments to decrease and tax revenues to decrease. C. transfer payments to increase and tax revenues to increase. D. transfer payments to increase and tax revenues to decrease

D. transfer payments to increase and tax revenues to decrease

The largest and​ fastest-growing category of federal expenditures is A. transfer payments. B. defense spending. C. grants to state and local governments. D. interest on the national debt.

TRANSFER PAYMENTS