Macroeconomics Chapter Thirteen

Social Security and Medicare trust funds are assets held by these programs to help pay for future projected tax revenue shortfalls. asset projections used to plan for program expenditures. a description of the cost of these programs. congressional funds held in trust to finance these programs once they are no longer solvent.

assets held by these programs to help pay for future projected tax revenue shortfalls.

Built-in (automatic) stabilizers work by changing __________ so that changes in GDP are reduced. government payouts and interest rates wages and prices taxes and government payouts interest rates and investment

taxes and government payouts

Suppose that the investment demand curve in a certain economy is such that investment declines by $100 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $150 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out?

$50 billion

Refinancing of the public debt might drive up real interest rates because the Treasury charges the government more than the private sector. government borrowing to finance the debt increases demand for funds and competes with private borrowing. borrowing rates are higher than lending rates. bonds have higher interest rates than other assets.

government borrowing to finance the debt increases demand for funds and competes with private borrowing.

Refinancing of the public debt might cause lower interest rates, which can lower investment, and economic growth slows. higher interest rates, which can raise investment, and economic growth increases. lower interest rates, which can raise investment, and economic growth increases. higher interest rates, which can lower investment, and economic growth slows.

higher interest rates, which can lower investment, and economic growth slows.

The problem of time lags in enacting and applying fiscal policy is discretionary fiscal policy only works in certain economic situations. for a policy to have its full effect on the economy, it must be enacted in three months; however, it usually takes longer. in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed. there are offsetting circumstances that can occur in the private market.

in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed.

When economists say Social Security and Medicare are "pay-as-you-go" plans, they mean current Social Security retirees have to pay some of these costs themselves. most of the current revenues from the Social Security tax are paid to current Social Security retirees. most of the past revenues from the Social Security tax are paid to current Social Security retirees. future Social Security retirees have to pay some of these costs now.

most of the current revenues from the Social Security tax are paid to current Social Security retirees.

If the annual interest payments on the U.S. public debt sharply increased as a percentage of GDP, then the government would have to use tax revenues or go deeper into debt. interest payments would represent a smaller portion of tax revenues. GDP would fall. there would be a smaller debt load.

the government would have to use tax revenues or go deeper into debt.

Social Security and Medicare trust funds are projected to be depleted by 2033 and 2024, respectively. 2037 and 2057, respectively. 2024 and 2033, respectively. 2057 and 2037, respectively.

2033 and 2024, respectively.

What type of tax system would have the most built-in stability? Proportional tax system, because those with higher incomes will pay more in taxes, thus having more of a dampening effect on rising (or falling) incomes. Progressive tax system, because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes. Regressive tax system, because those with higher incomes pay a smaller proportion of their income in tax and thus can spend more. Regressive tax system, since it acts as a cushion on declining incomes—the tax bite is less, which leaves more of the lower income for spending.

Progressive tax system, because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes.

In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion, driving the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Which of the following is true? There is a crowding-out effect of $20 billion. There is no crowding-out effect because both the government and firms are still borrowing a lot. There is no crowding-out effect because the government's increase in borrowing exceeds firms' decrease in borrowing. There is a crowding-out effect of $25 billion.

There is a crowding-out effect of $20 billion.

The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand and raising taxes simultaneously to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is: the worst possible combination of tax and expenditure changes. a mediocre and contradictory combination of tax and expenditure changes. the best possible combination of tax and expenditure changes.

a mediocre and contradictory combination of tax and expenditure changes.

The crowding-out effect is an increase in investment spending caused by a decrease in interest rates arising from an increase in government spending. a reduction in investment spending caused by a decrease in interest rates arising from an increase in government spending. an increase in investment spending caused by an increase in interest rates arising from an increase in government spending. a reduction in investment spending caused by an increase in interest rates arising from an increase in government spending.

a reduction in investment spending caused by an increase in interest rates arising from an increase in government spending.

True or False? a. The total public debt is more relevant to an economy than the public debt as a percentage of GDP. b. An internally held public debt is like a debt of the left hand owed to the right hand. c. The Federal Reserve and federal government agencies hold more than three-fourths of the public debt. d. As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced industrial nations.

a. False b. True c. False d. False

Expectations of a near-term policy reversal weaken fiscal policy because people tend to make decisions based on pre-tax income. interest rates will usually rise, offsetting any change in fiscal policy. tax cuts are combined with spending increases so there is no real effect. consumers may hesitate to increase their spending because they believe that tax rates will rise again.

consumers may hesitate to increase their spending because they believe that tax rates will rise again.

A political business cycle is the idea that politicians are more interested in reelection than in stabilizing the economy. the economy usually expands during election years because there is extra spending. politicians are more interested in adding spending programs than in getting elected. the economy usually contracts during election years because there is intense scrutiny on spending.

politicians are more interested in reelection than in stabilizing the economy.

If public investment financed through borrowing complements private investment, private borrowers may be willing to pay higher interest rates associated with financing the public debt. there will be lower prices than otherwise would occur. there will be less public borrowing needed and less pressure on interest rates. private borrowers will be more resistant to paying higher interest rates associated with financing the public debt.

private borrowers may be willing to pay higher interest rates associated with financing the public debt.

The key long-run problem of both Social Security and Medicare is the aging population and age distribution of the U.S. population. the poor health of current U.S. retirees. the lack of funding for these programs. the increasing number of immigrants entering the United States.

the aging population and age distribution of the U.S. population.