Unit 9 Chapter 16: Fiscal Policy

Which of the following statements about the federal debt is​ correct? A. Interest payments are currently about 60 percent of total federal expenditures. B. If the debt becomes very large relative to the​ economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt. C. Given the current interest payments as a percent of total federal​ expenditures, there is a great need for immediate tax increases or significant cutbacks in other types of federal spending. D. The federal government is in danger of defaulting on its debt.

B. If the debt becomes very large relative to the​ economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt.

Which of the following are categories of federal government​ expenditures? A. transfer payments B. grants to state and local governments C. interest on the national debt D. All of the above.

D. All of the above.

A simplified tax code would reduce economic efficiency by increasing the number of decisions households and firms make solely to reduce their tax payments.

False

The higher the tax​ rate, the larger the multiplier effect.

False

In the context of what was happening in the economy in​ 1929, President Hoover was _________ in saying​ that, in​ 1932, nothing was more necessary than balancing the federal​ government's budget.

Incorrect In the context of a​ recession, most economists would argue that stimulating the economy to recover from the recession would be more important than balancing the​ budget, especially if doing so meant a contractionary​ policy!

What is the​ long-run effect of a permanent increase in government​ spending?

The decline in​ investment, consumption, and net exports exactly offsets the increase in government​ spending; therefore, real GDP remains unchanged.

U.S. federal government expenditures are comprised of purchases of goods and services​ (defense spending plus spending on all​ day-to-day activities), transfer​ payments, interest​ payments, and grants to state and local governments. Which of the following statements is​ true?

Transfer payments are the largest component of the federal budget​ (about 50%) followed by defense spending​ (about 20%), while spending on all its​ day-to-day activities is the smallest component​ (about ​8%).

Few economists believe the federal government should attempt to balance its budget every year.

True

The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.

True

If the government cuts taxes in order to increase aggregate​ demand, the action is called

a discretionary fiscal policy.

The​ over-65 population is increasing so rapidly because

after​ WWII, there was a​ "baby boom," but after 1965 birthrates fell.

The increase in the number of people age 65 or older will result in _________in federal spending on Social Security and Medicare as a percentage of GDP.

an increase

The effect on the economy of tax reduction and simplification is

an increase in the quantity of real GDP supplied at every price​ level, and a shift in the​ long-run aggregate supply curve.

Changes in taxes and spending that happen without actions by the government are called

automatic stabilizers.

The large budget deficits of​ $1.4 trillion in fiscal year 2009 and​ $1.3 trillion in fiscal year 2010 were

caused partly by the increase in government spending including spending to bail out failed financial institutions and by the deep decline in tax revenues as incomes and profits fell.

During a​ recession, a​ government's budget deficit will

increase as there are more government expenditures for income support programs and less tax revenue as income falls.

Between the beginning of 2009 and the end of​ 2010, real GDP​ ________, while employment​ ________.

increased by 4.0​ percent; declined by 3.3 million

Government debt

increases when the government runs a budget​ deficit, and rises during recessions and wars.

The U.S. federal government raises revenue from individual and corporate income​ taxes, social insurance​ taxes, and other sources​ (including excise​ taxes, tariffs, and payments to cut timber on federal​ lands). The largest share of federal revenues comes from

individual income taxes​ (about 44%), followed by social insurance taxes​ (about 35%) and corporate income taxes​ (about ​13%).

The cyclically adjusted budget deficit

is measured as if the economy were at potential real GDP.

If a tax cut has​ supply-side effects, then

it will affect both aggregate demand and aggregate supply.

The federal​ government's day-to-day activities include running federal agencies like the Environmental Protection​ Agency, the​ FBI, the National Park​ Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up

less than 10 percent of federal government expenditures.

Economists use the term fiscal policy to refer to changes in taxing and spending policies

only by the federal government.

The recessions accompanied by a financial crisis are more severe than recessions that do not involve bank crises because

severe financial crises collapse asset​ markets, lower real housing prices and cause a significant fall in GDP and employment.

If current projections of federal spending on Social Security and Medicare are​ accurate, policymakers are faced with the choice of

significantly restraining spending on these programs​ and/or greatly increasing taxes on households and firms.

The Greek government responded to the recession by cutting its budget in contrast to the typical​ response, which is to

spend more. Historically high overspending had weakened its economy.

Crowding out refers to

the decline in private expenditures that result from an increase in government purchases.

The​ long-run growth rate of real GDP depends primarily on

the growth in the number of hours worked. and the growth rate of labor productivity as measured by the growth in real GDP per hour worked.

Economists believe that the smaller the tax wedge for any economic​ activity, such as​ working, saving,​ investing, or starting a​ business,

the more of that economic activity that will occur.

The national debt is best measured as

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

The goal of expansionary fiscal policy is

to increase aggregate demand.

The largest and​ fastest-growing category of federal expenditures is

transfer payments.

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not​ increase?

​Yes, because fiscal policy and monetary policy are separate things.

An attempt to reduce inflation requires​ _____________ fiscal​ policy, which causes real GDP to​ _________ and the price level to​ __________.

​contractionary; fall; fall

According to the​ crowding-out effect, if the federal government increases​ spending, the demand for money and the equilibrium interest rate will​ ___________, which will cause​ consumption, investment, and net exports to​ ___________.

​increase; decrease

Budget deficits automatically​ __________ during recessions and​ __________ during expansions.

​increase; decrease

Over​ time, potential GDP​ ________, which is shown by the​ ________ curve shifting to the right.

​increases; long-run aggregate supply

Expansionary fiscal policy has a​ ________ multiplier effect on equilibrium real​ GDP, and contractionary fiscal policy has a​ ________ multiplier effect on equilibrium real GDP.

​positive; negative

Since World War​ II, the federal​ government's share of total government expenditures has been between

​two-thirds and​ three-quarters.

About​ ________ of the American Recovery and Reinvestment Act stimulus package took the form of increases in government​ expenditures, and about​ ________ took the form of tax cuts.

​two-thirds; one-third