Econ exam 3 mod 9

Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscalyear, its purchases of goods and services and its transfers are $2 trillion, and taxrevenues are $1.5 trillion. At the end of the fiscal year, the debt is:

$7.5 trillion.

Which statement is CORRECT?

Discretionary fiscal policy indicates deliberate action by policy makers

The federal budget is defined as

an annual statement of expenditures and tax revenues of the U.S. government

During a recession, unemployment benefit payments increase without the need for anygovernment action. This increase is an example of

automatic fiscal policy.

In the United States for the year 2020, the federal government had a ________ so the nationaldebt was ________.

budget deficit; increasing

Government expenditure ________ change potential GDP and taxes ________ change potentialGDP

can; can

Automatic stabilizers include

changes in induced taxes and changes in needs-tested spending

Some argue that budget deficits will lead to reduced private spending because:

consumers, anticipating higher taxes, will reduce consumption to save money topay the future taxes.

In a recession, needs-tested spending ________ and induced taxes ________.

increases; decrease

The supply-side effects show that a tax cut on labor income ________ employment and________ potential GDP

increases; increases

Suppose that the government increases spending more than is necessary to close arecessionary gap. What is the MOST likely result?

inflation will increase.

Discretionary fiscal policy is defined as fiscal policy

initiated by an act of Congress.

A reason why discretionary fiscal policy might move the economy away from potential GDPinstead of toward potential GDP is that

it is difficult to know whether real GDP is above or below potential GDP

Discretionary fiscal policy is handicapped by

law-making time lags, estimation of potential GDP, and economic forecasting.

An increase in taxes on labor income shifts the labor supply curve ________, and the ________.

leftward; after-tax wage rate falls

The national debt is the amount

of debt outstanding that arises from past budget deficits

Automatic stabilizers are defined as

policy that stabilizes without the need for action by the government

Needs-tested spending is defined as

spending on programs for people qualified to receive benefits

The government has a budget surplus if

tax revenues are greater than outlays.

The law-making time lag is best described as the time that it takes

Congress to PASS laws needed to change taxes or spending.

Looking at the supply-side effects on aggregate supply shows that a tax hike on labor income

Both answers A and B are correct.

Do economists believe that the budget should be balanced each fiscal year?

No, a budget should be balanced only on average; it can be in a deficit during arecession and offset by surpluses when the economy is doing well.

Do automatic fiscal stabilizers eliminate business cycles?

No, but they do moderate business cycles

(Figure: Short- and Long-Run Equilibrium II) Refer to Figure: Short- and Long-RunEquilibrium II. Which action would be the appropriate response on the part of thegovernment upon viewing the state of the economy?

Raise tax rates to close the inflationary gap

Suppose the government increases taxes by more than is necessary to close aninflationary gap. What is the MOST likely result?

The economy will move into a recession

When tax revenues equal government outlays, the situation is referred to as

a balanced budget.

The difference between a budget deficit and government debt is that:

a deficit is the amount by which government spending exceeds tax revenues,whereas debt is the sum of money the government owes.

In 2009, Congress passed tax laws to reduce income tax rates for some taxpayers. This action iscalled

a discretionary fiscal policy.

if the government increases spending to eliminate the recessionary gap portrayed in the abovefigure, the result is ________ price level and ________ government budget deficit.

a higher; a larger

The crowding out effect refers to the ________ from ________ in the government's budgetdeficit.

decrease in investment; an increase

Suppose the government increases spending to fund tuition assistance for qualifiedcollege students. Automatic stabilizers will _____ the _____ effect of the _____ inaggregate demand

decrease; expansionary; increase

An increase in the income tax ________ potential GDP by shifting the labor ________ curve________.

decreases; supply; leftward

If tax revenues are $230 billion and the government's outlays are $235 billion, then the budget

deficit is $5 billion and government debt will increase by $5 billion.

The government collects tax revenues of $100 million and has $105 million in outlays. Thebudget balance is a

deficit of $5 million.

If fiscal stimulus creates a large budget ________, then in the long run economic growth________

deficit; decreases

An example of automatic fiscal policy is

expenditure for unemployment benefits increasing as economic growth slows.

When the government's expenditures exceed its tax revenues, the budget

has a deficit and the national debt is increasing

The use of discretionary fiscal policy is hampered byi. difficulty of estimating the level of potential GDP.ii. lack of accuracy of economic forecasts.iii. the small impact tax cuts and increases in government expenditure have on aggregatedemand

i and ii

Transfer payments includei. social security benefits.ii. medicare and medicaid benefits.iii. unemployment benefits

i, ii, and iii

An economy is at a short-run equilibrium as illustrated in the above figure. An appropriateFISCAL policy option to move the economy to full employment is to

increase government expenditure and move the economy to a full-employmentequilibrium at point b.

After passage of the stimulus in 2009 government borrowing _____, and interestrates_____.

increased; remained very low

Induced taxes are defined as taxes

that vary with real GDP.

What two parts of the government determine the federal budget?

the Congress and the President

In order for the United States to use discretionary fiscal policy to deal with a recessionary gap

time must pass in order for Congress to decide what taxes and government programs tochange

Neoclassical economists argue that expansionary fiscal policy:

will have no effect on the economy because consumers, anticipating higher taxes topay for government spending, will decrease spending today to save for the highertaxes