Chapter 11
Refer to the table below. $_____ is the equilibrium level of income in this model. Y = C + I + G C = 200 + 0.85(Y - T) I = 600 G = 1,200 T = 0.2Y
6,250 Plugging in the variables into the model, where Y = 200 + 0.85 (Y - 0.2Y) + 600 + 1200; Y = 2000 + 0.85 (0.8Y); then Y = 2000 + 0.68Y; then subtracting 0.68Y on both sides to isolate the Y variable; 0.32Y = 2000; divide by 0.32 on both sides; then Y = 6,250.
Identify a major complication associated with fiscal policy directed to reduce aggregate demand.
A constant change in net exports and investment activities in an economy due to other events
_____ is a policy measure that can be used to counteract inflation with the minimum impact on the federal budget deficit.
A decrease in government purchases
_____ helps eliminate an inflationary gap.
A downward shift of the expenditure schedule
_____ lead to an outward shift in the aggregate demand curve.
A tax cut and an increase in government spending
Which of the following is a possible effect of a decrease in the personal income tax rate?
An increase in consumption expenditure and an increase in GDP
Which of the following does not resemble an automatic stabilizer during a recession?
An increase in the tax rate
Which of the following is a result of supply-side policies?
Eliminates the trade-off between inflation and unemployment
Which of the following is true of government transfer payments?
Government transfer payments function as negative taxes.
Which of the following does not describe a shortcoming of fiscal policy?
It has a large impact on international trade and its use impacts foreign relations.
Which of the following is a possible effect of an increase in tax rates on the expenditure schedule?
It leads to a downward shift in the schedule.
MPC=ChangMPC=Change in ConsumptionChange in Disposable Incomee in ConsumptionChange in Disposable Income
MPC=Change in ConsumptionChange in Disposable Income
Identify a policy measure that will help a government deal with an inflationary pressure.
Reduction in government purchases
Identify the statement that illustrates a criticism of supply-side economics.
Supply-side economics exaggerates the effects of tax cuts.
Identify the statement that is true of the term "taxes."
Taxes are the difference between GDP and disposable income.
Which of the following factors do not reduce the impact of the oversimplified formula of the multiplier?
The consumption of households
A supply-side economist will favor
a cut in tax on income from savings.
An automatic stabilizer is
a feature of the economy that reduces its sensitivity to shocks, such as sharp increase or decrease in spending.
Expansionary fiscal policy along with an increase in the price level will lead to
an increase in real GDP.
The consumption schedule _____ when an income tax is added to the basic macroeconomic model.
becomes flatter
Daniel is a conservative. If Daniel is asked to suggest a policy measure that will help increase aggregate demand, he will suggest a(n)
decrease in the tax rates.
The amount actually available to the consumers that determines aggregate demand is known as
disposable income.
Suppose the federal government increases the tax on social security in order to balance the federal budget. An increase in taxes on social security will lead to a(n)
fall in the GDP.
The value of the spending multiplier decreases when _____ are included in the basic macroeconomic model.
income taxes
What are the factors that decrease the spending multiplier
income taxes, inflation, and imports
The supply-side tax cuts imply that certain tax cuts will lead to a(n)
increase in aggregate supply.
A(n) _____ will provide fiscal stimulus to an economy.
increase in government purchases
There is an _____ as a result of a reduction in the capital gains tax, often advocated by proponents of supply-side economics.
increase in investment spending
Suppose the demand-side effects of supply-side tax cuts is greater than the supply-side effects. This will result in a(n)
increase in output and prices.
Suppose the government of Baltonia imposes a fiscal policy that reduces tax rates. This fiscal policy measure by the government will lead to a(n)
increase in real GDP and the price level.
Democrats opposed the Tax Cuts and Jobs Act of 2017 for these two reasons, that it would
increase the budget deficit and create an inflationary gap—it was not the best time to increase aggregate demand since the economy was near potential output.
One way to reduce the inflationary gap through contractionary fiscal policy is by
increasing taxes. Politicians can reduce the inflationary gap by reducing transfer payments, reducing government spending, and increasing taxes. The intention is to reduce aggregate demand which would reduce the price level and reduce real GDP.
An economy is in a recessionary gap when
it experiences an unplanned inventory accumulation and GDP will be less than potential GDP.
Supply-siders tout that lower taxes will increase output and ________ the price level via aggregate supply, when in fact, lower taxes may boost aggregate demand more than aggregate supply, which would _________ the price level
lower, raise
One way to reduce the recessionary gap through fiscal policy is by
raising government purchases
The government should _____ when total expenditures exceed the economy's potential GDP.
reduce the purchase of goods and services
The consumption schedule _____ with an increase in a fixed tax rate by the government.
shifts down
Losses in tax revenue may occur with
supply-side policy and expansionary fiscal policy.
Most economists believe these conclusions regarding supply-side tax initiatives, except
supply-side tax cuts are likely to reduce inflationary gaps.
What factors reduce the oversimplified multiplier
the value of variable imports, the price-level, and the value of income taxes
Transfer payments resemble negative taxes because
they are income received, but unearned.
A policy measure that reduces aggregate demand in an economy in an attempt to reduce an inflationary gap leads to an increase in
unemployment.
