Macroeconomics Chapter 16 Homework

If the government purchases multiplier equals​ 2, and real GDP is​ $14 trillion with potential real GDP​ $14.5 trillion, then government purchases would need to increase by​ ________ to restore the economy to potential real GDP.

$250 billion

Which of the following would be considered a fiscal policy​ action?

A tax cut is designed to stimulate spending during a recession.

Reducing the marginal tax rate on income will

All of the above are correct. (raise the return to entrepreneurship and encourage the opening of new businesses. reduce the tax wedge faced by workers and increase labor supplied. increase the after−tax return on​ saving, and encourage saving.)

Refer to the figure. Suppose the economy is in​ short-run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to​ long-run equilibrium, this would be depicted as a movement from​ _______ using the basic AD-AS model in the figure.

C to B

Refer to the figure. Suppose the economy is in​ short-run equilibrium above potential GDP and no policy is pursued. Using the basic AD-AS model in the​ figure, this would be depicted as a movement from

C to D.

In the long​ run, most economists agree that a permanent increase in government spending leads to

a decrease in private spending by the same amount that government spending increased.

Which of the following would increase the size of the government purchases​ multiplier?

a decrease in the amount saved by households from an increase in income

A change in consumption spending caused by income changes is​ __________ change in​ spending, and a change in government spending that occurs to improve roads and bridges is​ __________ change in spending.

an​ induced; an autonomous

The increase in the amount the government collects in taxes when the economy expands and the decrease in the amount the government collects in taxes when the economy goes into a recession is an example of

automatic stabilizers.

If the tax multiplier is -1.5 and a​ $200 billion tax increase is​ implemented, what is the change in​ GDP, holding all else​ constant? (Assume the price level stays​ constant.)

a​ $300 billion decrease in GDP

The aggregate demand curve will shift to the right​ ________ the initial increase in government purchases.

by more than

Expansionary fiscal policy

can be effective in the short run.

Refer to the figure. In the dynamic model of AD-AS in the​ figure, if the economy is at point A in year 1 and is expected to go to point B in year​ 2, Congress and the president would most likely pursue

contractionary fiscal policy.

From an initial​ long-run equilibrium, if aggregate demand grows more slowly than​ long-run and​ short-run aggregate​ supply, then Congress and the president would most likely

decrease taxes.

An economic expansion tends to cause the federal budget deficit to​ ________ because tax revenues​ ________ and government spending on transfer payments​ ________.

decrease; rise; fall

If the economy is falling below potential real​ GDP, which of the following would be an appropriate fiscal policy to bring the economy back to​ long-run aggregate​ supply? An increase in

government purchases.

A tax​ rebate, which is expected to be offered in this and all future​ years, will

have a significant positive effect on consumption and aggregate​ demand, with aggregate demand growing by a multiple of the tax rebate.

During 1970−​1997, the U.S. federal government was

in deficit every year.

Consider a tax cut which affects not only consumer disposable​ income, but also after−tax earnings from labor supplied to labor markets and from financial assets acquired through saving. In the long run we would expect this tax cut to

increase both the price level and the level of real GDP.

In the graph to the​ right, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could Congress and the president use to move the economy to point C​?

increase government purchases

Given that the economy has moved from A to B in the graph to the​ right, which of the following would be the appropriate fiscal policy to achieve potential​ GDP?

increase government spending

In the graph to the​ right, if the economy is at point A​, an appropriate fiscal policy by Congress and the president would be to

increase government transfer payments.

Refer to the figure. In the dynamic model of AD-AS in the​ figure, if the economy is at point A in year 1 and is expected to go to point B in year​ 2, Congress and the president would most likely

increase taxes.

Suppose the government wants to maintain a balanced budget. To achieve this​ goal, when the economy falls into recession government would need to​ ________ taxes, which would cause aggregate demand to​ ________.

increase; decrease

Tax reduction and simplification should​ ________ long−run aggregate supply and​ ________ aggregate demand.

increase; increase

A tax​ rebate, like the one issued in​ 2008, is likely to​ ________ consumption spending​ ________ than would a permanent tax cut.

increase; less

Which of the following would not be considered an automatic​ stabilizer?

legislation increasing funding for job retraining passed during a recession

Suppose real GDP is​ $12.6 trillion and potential GDP is​ $12.4 trillion. To move the economy back to potential​ GDP, Congress should

lower government purchases by an amount less than​ $200 billion.

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be​ ________ and real GDP to be​ ________.

​higher; higher

Compared to the averages for post World War II​ recessions, the recession of 2007−2009 was​ ________ in duration and the decline in real GDP was​ ________.

​longer; greater

Which of the following is a reason why we should consider the federal national debt a​ problem?

If the debt drives up interest​ rates, crowding out will occur.

​________ and​ ________ are the largest sources of revenue collected by the federal government.

Individual income​ taxes; social insurance taxes

Which of the following is a government​ expenditure, but is not a government​ purchase?

The federal government pays out an unemployment insurance claim.

If tax reduction and simplification are​ effective, then

economic efficiency will increase.

An increase in government purchases will increase aggregate demand because

government expenditures are a component of aggregate demand.

The three categories of federal government​ expenditures, in addition to government​ purchases, are

interest on the national​ debt, grants to state and local​ governments, and transfer payments.

Economists who believe the supply side effects of tax cuts are small essentially believe that

tax cuts mainly affect aggregate demand.

When President Obama took office in January​ 2009, he pledged to pursue an expansionary fiscal policy to try to pull the economy out of the recession. The next​ month, Congress passed the American Recovery and Reinvestment Act of​ 2009, a​ $840 billion package of spending increases and tax cuts that was

the largest fiscal policy action in U.S. history.

The federal government debt equals

the total value of U.S. Treasury bonds outstanding.

Refer to the figure. In the dynamic model of AD-AS in the​ figure, if the economy is at point A in year 1 and is expected to go to point B in year​ 2, and no fiscal or monetary policy is​ pursued, then at point B

the unemployment rate is very low.