MACRO Exam 4 Review

You have been hired as an economic advisor for a politician running for national office. At a recent campaign event, the politician said that corporations are paying too much in taxes and are funding most of the federal government's operations. When you speak to the politician after the event, what would you say?

"We have a great deal of work to do. On the news tonight, I predict there will be an expert correcting you and questioning why anyone would vote for you. Individuals, through income tax and social insurance taxes, provide the bulk of the federal government's revenue."

The American Recovery and Reinvestment Act introduced a large amount of government spending into the economy—$789 billion! Suppose the marginal propensity to consume in the United States is 0.75. How much would the program increase total spending in the economy?

$3,156 billion

Which of the following statements is consistent with what happened during the Great Recession?

- Aggregate demand and long-run aggregate supply decreased, causing unemployment to rise to 10%.

List Classical Economist idea

- I don't think there's a problem. The economy recovers well on its own. - Rather than increasing government spending, the government should do more to stimulate saving. - The governmental policy should not intervene in the business cycle because the economy can correct itself. - If you want to help the economy, you should increase your savings. - The long run is the key time period. - Savings is crucial to economic growth. - Supply is the key side of the market.

The budget of the federal government is dramatically different than it was 50 years ago. In what way is it different?

- Mandatory spending has increased as the population has gotten older and the Social Security and Medicare programs have expanded.

What changes have been made to the Social Security program since its creation in 1935?

- Social Security taxes as a percentage of income have increased over time. - The number of workers per retiree has decreased. - The length of time that individuals collect Social Security benefits has gotten longer.

Suppose that, during a recession, the government borrows money to provide free wireless Internet access in urban areas. Which of the following statements are correct?

- The free wireless Internet access in urban areas will likely raise interest rates as the government borrows more money to finance the purchase. - Crowding-out will occur as individuals choose to rely on free Internet service instead of purchasing their own. - This policy will likely be accompanied by an impact lag as the policy takes time to make its way to the people.

When the economy is in a recession, the government can use expansionary fiscal policy to stimulate and encourage economic growth. Which of the following scenarios represent expansionary fiscal policies from both a supply perspective and a demand perspective?

- The government lowers tax rates and issues a partial refund of taxes that have already been paid - The government lowers tax rates and begins a military buildup

List Keynesian Economist idea

- Workers are unlikely to take pay cuts because of money illusion. - Consumer confidence and spending are down. The government needs to increase spending. - We can't wait for the economy to recover. After all, in the long run, we are dead. - If you want to help the economy, you should increase your spending. - The governmental policy should focus on counteracting short-run fluctuations in the economy. - Prices are sticky. - Cyclical unemployment is the norm.

Which of the following variables will not be affected by monetary policy in the long run?

- employment - real GDP

Monetary policy is limited in its impact when

- people adjust their expectations of inflation - changes in aggregate supply lead to lower real GDP.

Which of the following policies would dramatically and permanently reduce government outlays?

- reducing the number of people eligible for Medicare and Medicaid by half - means-testing Social Security

Suppose the economy is in a recession. The economy needs to expand by at least $400 billion, and the marginal propensity to consume is 0.9. What is the least amount the government can spend to overcome the $400 billion gap?

40 billion

The government announced that last year it spent $616 million in mandatory outlays and $416 million in discretionary outlays. It received $1012 million in revenue.

Last year, the government had a budget deficit of $20 million.

Using words, how would you justify this subsidy?

The subsidy that the government provides to universities leads to a shift in the long-run aggregate supply curve to the right as the capacity of the country increases.

During the Great Recession, the U.S. budget deficit worsened as tax collections fell and payments to the poor rose. In other words, the deficit worsened as a result of _________ in the federal budget.

automatic stabilizers

Of the following types of government spending, which are discretionary and which are mandatory components of a government budget? - A new interstate highway:

discretionary

Of the following types of government spending, which are discretionary and which are mandatory components of a government budget? -A new interstate highway:

discretionary

The multiplier effect of fiscal policy predicts that an increase in government spending of $100 billion will increase total income by $666.67 billion if the marginal propensity to consume is 0.85. If we account for crowding-out, then the increase in aggregate demand will be

less than $666.67 billion.

In every state, there is a government-subsidized university. This subsidy, in theory, would make it possible for tuition to be lower than it otherwise would have been. How might an economist employed by the government justify the subsidy? As the ________ shifts to the right, the equilibrium real GDP increases.

long-run aggregate supply

Of the following types of government spending, which are discretionary and which are mandatory components of a government budget? -Medicare:

mandatory

Which category is the largest percentage of the U.S. government budget?

mandatory spending

Suppose that real GDP is greater than the full-employment output level. Initially, this seemed like a good thing. However, it has resulted in a higher rate of inflation. If the central bank decides to implement monetary policy to control the higher inflation, what will happen to real GDP and unemployment in the short run?

real GDP falls and unemployment rises

Consider the impact of monetary policy over time. In the short run, ________ prices adjust. In the long run, _________ prices adjust.

some, all

If the government gave tax breaks for education, what type of fiscal policy would that be?

supply-side fiscal policy