Government budget and Fiscal Policy

False

(True/False) If government policymakers were worried about the inflationary potential of the economy, fiscal policy will change by increasing consumption taxes.

True

(True/False) If government policymakers were worried about the inflationary potential of the economy, fiscal policy will change by increasing government purchases.

False

(True/False) If government policymakers were worried about the inflationary potential of the economy, fiscal policy will change by increasing the budget deficit.

False

(True/False) If government policymakers were worried about the inflationary potential of the economy, fiscal policy will change by reducing government purchases.

False

(True/False) The government finance budget deficits... It does nothing to finance budget deficits.

False

(True/False) The government finance budget deficits... It is primarily financed by foreign investors.

True

(True/False) The government finance budget deficits... It issues debt to government agencies, private institutions, and private investors.

False

(True/False) The government finance budget deficits... The Federal Reserve creates new money.

Decreased, increased

(Using the accompanying graph) In order for the economy pictured here to return to RGDPNR, this economy could use _____(Increased/Decreased) taxes and _____(Increased/Decreased) government purchases.

Expenditure multiplier

1/(1 - MPC)

Proportional tax

A _____ is calculated as a flat percentage of income earned, regardless of level of income.

Budget deficit

A _____ is created each time the federal government spends more than it collects in taxes in a given year.

Budget Deficit

A _____ is created when government spending exceeds its tax revenues.

Balanced budget

A _____ means that government spending and taxes are equal.

AD

A combination of an increase in government purchases and a decrease in taxes would increase _____.

Countercyclical fiscal policy

A lag occurs between a change in fiscal policy and its effect.

AD, real output, the price level, employment

A policy which increased the federal government deficit would tend to increase which of the following in the short run, other things being equal?

Contractionary

A typical _____ fiscal policy allows government to decrease the level of aggregate demand, through increases in taxes.

Rose

AD will shift to the right, other things being equal, when the government budget deficit increases because government purchases _____(Rose/Fell).

Fell

AD will shift to the right, other things being equal, when the government budget deficit increases because taxes _____(Rose/Fell).

Rose

AD will shift to the right, other things being equal, when the government budget deficit increases because transfer payments _____(Rose/Fell).

Progressive tax

A_____ policy will cause a greater share of income to be collected from those with high incomes than from those with lower incomes.

Increase, up

According to the crowding-out effect, if the federal government borrows to finance deficit spending, the demand for loanable funds will _____(Increase/Decrease), driving interest rates _____(Up/Down).

AD

An increase in taxes combined with a decrease in government purchases would decrease _____.

Accumulated government debt

By June, 2010, the U.S. government owed $13.6 trillion dollars in _____ that, over time, has remained unpaid.

Decreased, increased

Contractionary fiscal policy consists of a(n) _____(Increased/Decreased) in government spending and _____(Increased/Decreased) in taxes.

Increase, falls

During a recession, government transfer payments automatically will _____(Increase/Decrease) and tax revenue automatically _____(Rises/Falls).

Expansionary

During a recession, if a government uses an _____ fiscal policy to increase GDP, the aggregate demand curve will shift to the right.

Countercyclical fiscal policy

Fiscal policy is based on forecasts, which are not foolproof.

Raise, reduce, reduce

Higher budget deficits would tend to _____(Raise/Reduce) interest rates, _____(Raise/Reduce) investment, and _____(Raise/Reduce) the growth rate of the capital stock.

Countercyclical fiscal policy

How much of the multiplier effect will take place in a given amount of time is uncertain.

Increase

If a country's GDP decreases, but its debt increases during that year, then the country's debt to GDP ratio for the year will _____(Increase/Decrease) in proportion to the magnitude of the changes.

Expansionary

If a government reduces taxes in order to increase the level of aggregate demand, what type of fiscal policy is being used?

Decrease, Increase

If an economy moves into a recession, causing that country to produce less than potential GDP, then automatic stabilizers will cause tax revenue to _____(Increase/Decrease) and government spending to _____(Increase/Decrease).

Regressive

If government tax policy requires Peter to pay $15,000 in tax on annual income of $200,000 and Paul to pay $10,000 in tax on annual income of $100,000, then the tax policy is _____.

Decrease, increase, increase

If the government wanted to move the economy out of a current recession, which of the following might be an appropriate policy action? A(n) _____(Increase/Decrease) in taxes, _____(Increase/Decrease) in government purchases of goods and services, and _____(Increase/Decrease) in transfer payments.

Decrease, increase

If the government wanted to offset the effect of a boom in consumer and investor confidence on AD, it might _____(Increase/Decrease) government purchases and _____(Increase/Decrease) taxes.

3

If the marginal propensity to consume is two-thirds, the multiplier is _____.

Price level

In the short run, expansionary fiscal policy can cause a rise in real GDP in combination with a rise in the _____.

Increase 30, not change

Starting at full employment, if MPC = 2/3, an increase in government purchases of $10 billion would lead AD to _____(Increase/Decrease) $_____billion and _____ real output in the long run.

Increase 50

The federal government buys $20 million worth of computers from Dell. If the MPC is 0.60, what will be the impact on aggregate demand, other things being equal? Aggregate demand will _____ $_____million.

Expansionary fiscal policy, government spending

The government can use a(n) _____ in the form of an increase in _____ to increase the level of aggregate demand in the economy.

Contractionary

When inflation begins to climb to unacceptable levels in the economy, the government should use _____ fiscal policy to shift aggregate demand to the right.

Decrease, Decrease

When taxes are increased, disposable income will _____(Increase/Decrease), and hence consumption will _____(Increase/Decrease).

Discretionary

When the government passes a new law that explicitly changes overall tax or spending levels, it is enacting _____ fiscal policy.

Regressive

When the share of individual income tax collected by the government from people with higher incomes is smaller than the share of tax collected from people with lower incomes, then the tax is _____.