introduction macroeconomics ch 16

complete the following table for a static​ AD-AS model PROBLEM a) recession b) inflation POLICY a) expansionary b) contractionary ACTIONS a) increase government spending or _____ b) _____ or increase taxes RESULT a) real GDP and price level _____ b) real GDP and price level _____

ACTIONS a) decrease taxes b) decrease government spending RESULT a) rise b) fall

if the marginal propensity to consume equals 0.75​, the tax rate equals 0.20​, and the marginal propensity to import equals 0.05​, what is the value of the government purchases​ multiplier? the government purchases multiplier is equal to _____

ANSWER 2.22 1/ 1-MPC (1-T) + MPI 1/1-0.75 (1-0.20) + 0.05 1/1-0.75 (0.80) + 0.05 1/1-0.60+0.05 1/0.45 = 2.22

what are the gains to be had from simplifying the tax​ code?

all of the above a) increased efficiency of households and firms b) greater clarity of the decisions made by households and firms c) resources from the tax preparation industry freed up for other endeavors

how does a budget deficit act as an automatic stabilizer and reduce the severity of a​ recession?

all of the above a) transfer payments to households increase b) consumers spend more than they would in the absence of social insurance​ programs, like unemployment c) during​ recessions, tax obligations fall due to falling wages and profits

consider the figures below. determine which combination of fiscal policies shifted AD1 to AD2 in each figure and returned the economy to​ long-run macroeconomic equilibrium

example​ (A): expansionary fiscal policy. Example​ (B): contractionary fiscal policy

true or false: the multiplier effect is only a consideration for increases in government purchases

false

what is the difference between federal government purchases​ (spending) and federal government​ expenditures?

government purchases are included in government expenditures

the higher the tax rate, the _____ the multiplier effect

smaller

does government spending ever reduce private​ spending?

yes, due to crowding out

assuming a fixed amount of taxes and a closed economy and that the marginal propensity to consume equals 0.50​, calculate the value of the following multipliers. Be sure to use a negative sign​ (-) to show if a multiplier has a negative value. a) the government purchases multiplier equal _____ b) the tax multiplier equals _____ c) the balanced budget multiplier equals

a) 2 b) -1 c) 1

the simple multiplier effect shows the resulting change in real GDP due to an increase in government purchases or a decrease in taxes assuming that the price level is _____ in reality, the SRAS is _____ as a​ result, when AD shifts to the​ right, in reality the change in real GDP will be _____ it would be if the price level were constant

a) constant b) upward sloping c) less than

the figure illustrates the economy using the dynamic aggregate demand and aggregate supply model if actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06​, we would expect the federal government to pursue​ a(n) _____ fiscal policy if the​ government's policy is​ successful, what is the effect of the policy on the following macroeconomic​ indicators? b) actual real GDP _____ c) potential real GDP _____ d) price level _____ e) unemployment _____

a) contractionary b) decreases c) does not change d) decreases e) increases

The figure to the right illustrates the dynamic AD-AS model Suppose the economy is in equilibrium in the first period at point​ (A). In the second​ period, the economy reaches point​ (B). We would expect the federal government to pursue what type of policy in order to move to AD2 and AD2, policy, and reach equilibrium​ (point C) in the second​ period? _____ if the federal​ government's policy is​ successful, what is the effect on the following macroeconomic​ indicators? b) actual real GDP _____ c) potential real GDP _____ d) price level _____ e) unemployment _____

a) expansionary fiscal policy b) increases c) does not change d) increases e) decreases

from an understanding of the multiplier​ process, explain why an increase in the tax rate would decrease the size of the government purchases multiplier. a) the value of the government purchases multiplier would decrease because in the formula for the multiplier.. similarly, explain why a decrease in the marginal propensity to import would increase the size of the government purchases multiplier. b) the value of the government purchases multiplier would decrease because in the formula for the multiplier the denominator is..

a) the MPC is multiplied by​ (1 − t) b) 1 − [MPC×​(1−​t)−MPI]

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?

all of the above a) debt-spending on education b) debt-spending on research and development c) debt-spending on highways and port

​one-time tax​ rebates, such as those in 2001 and​ 2008, increase consumption spending by less than a permanent tax cut because​ one-time tax rebates increase

current income

the figure to the right illustrates the dynamic AD-AS model. suppose the economy is in equilibrium in the first period at point​ (A). In the second​ period, the economy reaches point​ (B). What policy would the federal government likely pursue in order to move AD2 to AD2, policy, and reach equilibrium​ (point C) in the second​ period?

increase government spending

consider the figure. An increase in government spending shifted the aggregate demand curve from AD1 to AD2. as a​ result, both price level and real GDP increased. What can be​ said, however, about the increase in real​ GDP?

it increased by less than indicated by a multiplier with a constant price level

as a result of crowding out in the short​ run, the effect on real GDP of an increase in government spending is often

less than the increase in government spending

after September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy?

no. the increase in defense spending after that date was designed to achieve homeland security objectives

policy that is specifically designed to affect aggregate supply and increase incentives to​ work, save, and start a​ business, by reducing the tax wedge is called

supply-side economics

When is it considered​ "good policy" for the government to run a budget​ deficit?

when borrowing is used for​ long-lived capital goods