Chapter 13: Fiscal Policy
The income-expenditure model predicts that if the marginal propensity to consume is 0.8 and the federal government decreases spending by $200 billion, real GDP will fall by:
$1,000 billion.
The effect of a government deficit is:
expansionary.
A change in taxes or a change in government transfers affects consumption through its effect on:
disposable income.
When the unemployment rate increases, the budget: 1.) tends to move into a surplus 2.) tends to move into deficit 3.) remains neutral 4.) is unaffected
2.) tends to move into deficit
If legislation required the budget to be balanced at all times, _____ as an automatic stabilizer of the business cycle.
fiscal policy could not operate
Look at the figure Inflationary and Recessionary Gaps. A movement from AD3 to AD1 could be caused by:
higher tax rates.
If the marginal propensity to consume is 0.75 and transfer payments increase by $30 billion, real GDP will:
increase by less than $120 billion
Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. ________ would close this recessionary gap. 1.) A $250 billion increase in government spending 2.) A $25 billion increase in government spending 3.) A $1,000 billion increase in government spending 4.) a $25 billion increase in taxes
1.) A $250 billion increase in government spending
An automatic stabilizer that works when the economy contracts is: 1.) a rise in the government transfers as more people receive unemployment insurance benefits 2.) a fall in government purchases 3.) a rise in tax receipts 4.) a discretionary decrease in government purchases
1.) a rise in the government transfers as more people receive unemployment insurance benefits
Social insurance programs are: 1.) government programs intended to protect families against economic hardships 2.) private insurance policies to protect families from hardships caused by government actions 3.) programs to help unemployed people have a social life 4.) private insurance policies that cover gaps in government provided health care
1.) government programs intended to protect families against economic hardships
Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD'': 1.) the economy is in long-run equilibrium 2.) a contractionary fiscal policy may be warranted 3.) an expansionary fiscal policy may be warranted 4.) the economy is in a recessionary gap
2.) a contractionary fiscal policy may be warranted
One of the shortcomings of fiscal policy is that:
it has time lags, so sometimes it may end up destabilizing the economy.
Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. Look at the scenario Fiscal Policy. Suppose the government decides to tax its citizens. The tax multiplier is:
less than the government spending multiplier.
The U.S. national debt as a percentage of GDP is _____ that of Greece.
lower than
Look at the figure Fiscal Policy Choices. In panel (a), the economy is initially at output level Y1 and there is: 1.) equilibrium at full employment 2.) no gap 3.) an inflationary gap 4.) a recessionary gap
4.) a recessionary gap
All of the following are examples of fiscal policy EXCEPT: 1.) increasing personal income tax deductions for home ownership 2.) increasing Medicaid reimbursements 3.) reducing federal subsidies to state universities 4.) reducing the money supply to raise the interest rate
4.) reducing the money supply to raise the interest rate
When the unemployment rate decreases, the budget: 1.) will always be balanced 2.) surplus gets smaller or the deficit gets larger 3.) is unaffected 4.) surplus gets larger or the deficit gets smaller
4.) surplus gets larger or the deficit gets smaller
Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is a decrease in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.
AD1; right; increase; increase
If the economy is at equilibrium below potential output, there is a(n) _____ gap, and _____ fiscal policy is appropriate.
recessionary; expansionary
The fact that tax receipts fall during a recession:
reduces the adverse effect of the initial fall in aggregate demand.
The larger the amount of outstanding public debt:
the larger the fraction of the federal budget deficit that must be devoted to interest payments.
Which of the following is NOT an argument AGAINST the use of expansionary fiscal policy?
Government borrowing may reduce the marginal propensity to consume.
Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y1 and P1, the government should use ________ fiscal policy to shift the aggregate demand curve to the ________. 1.) expansionary; left 2.) expansionary; right 3.) contractionary; left 4.) contractionary; right
3.) contractionary; left
Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD'', the most appropriate discretionary fiscal policy is to __________ government spending and __________ income tax rates. 1.) decrease; decrease 2.) increase; decrease 3.) decrease; maintain 4.) increase; maintain
3.) decrease; maintain
The stability pact signed in 1999 by the European nations that adopted the euro required each country to: 1.) supply a certain amount of euros each year 2.) keeps its cyclically balanced budget below 3% of its GDP 3.) balance its budget annually 4.) keep its actual budget deficit below 3% of its GDP
4.) keep its actual budget deficit below 3% of its GDP
Assume that marginal propensity to consumer is 0.8 and potential output is $800 billion. The tax multiplier is: 1.) exactly 0.8 2.) greater than 5 3.) impossible to determine 4.) less than 5
4.) less than 5
Suppose the economy is producing the output level Yp and a negative demand shock shifts the AD1 curve to AD3. The economy now has a(n) _________ gap, which can be closed by _________ fiscal policy. 1.) inflationary; contractionary 2.) inflationary; expansionary 3.) recessionary; contractionary 4.) recessionary; expansionary
4.) recessionary; expansionary
Consider an economy that already has a sizable budget deficit. If the economy is facing a major downturn, the government should: 1.) stimulate the economy by raising expenditure irrespective of the ratio of debt to GDP. 2.) not increase government expenditure, since the budget should be balanced. 3.) not stimulate the economy by raising expenditure because of the burden of debt. 4.) stimulate the economy by raising expenditure as long as the ratio of debt to GDP is declining.
4.) stimulate the economy by raising expenditure as long as the ratio of debt to GDP is declining.
Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $700 billion, which of the following policies would bring the economy to potential output?
Decrease taxes by $25 billion.
Look at the figure Short-Run Equilibrium. It reflects a short-run inflationary gap. According to the labeling on the graph, the size of the inflationary gap is equal to:
Y1 - YP.
An inflationary gap occurs when:
actual output exceeds potential output.
(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. The government should _____ aggregate demand by _____ taxes to close the _____ gap.
expand; cutting; recessionary
If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.
increase government purchases; AD; right
Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD, the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.
increase; maintain
If the marginal propensity to consume is 0.8 and government transfers decrease by $50 million, then equilibrium GDP will decrease by: 1.) $50 million 2.) $250 million 3.) $40 million 4.) $200 million
4.) $200 million
A contractionary fiscal policy is one that reduces aggregate demand by decreasing:
government purchases.
The multiplier effect of changes in government transfers is:
less than the multiplier effect of a change in government spending.
If the government spends an extra $5 billion on goods and services, GDP will: 1.) remain unchanged 2.) increase by less than $5 billion 3.) go up by $5 billion 4.) increase by more than $5 billion
4.) increase by more than $5 billion
For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is larger than the multiplier effect of a tax cut of $100 billion because: 1.) many households fail to file their income tax and claim their refund 2.) the government pays a higher price than households for the same goods and services 3.) in the first round of spending only $90 billion of the tax cut will be spent and $10 billion will be saved, while the entire $100 billion of government purchases will be spent 4.) production of the goods and services the government purchases has a bigger impact on real GDP than production of consumer goods
3.) in the first round of spending only $90 billion of the tax cut will be spent and $10 billion will be saved, while the entire $100 billion of government purchases will be spent
Suppose the economy is in a recessionary gap. A $100 billion ________ is likely to increase real GDP by the largest amount. 1.) increase in transfer payments 2.) decrease in taxes 3.) increase in government purchases 4.) increase in government purchases, paid for by a $100 billion increase in taxes.
3.) increase in government purchases
Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, its purchases of goods and services and its transfers are $2 trillion, and tax revenues are $1.5 trillion. At the end of the fiscal year, the debt is: 1.) $7.5 trillion 2.) $10.5 trillion 3.) $6.5 trillion 4.) $9 trillion
1.) $7.5 trillion
Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $850 billion, which of the following policies would bring the economy to potential output? 1.) Increase taxes by $12.5 billion 2.) Increase taxes by $10 billion 3.) Increase transfers by $12.5 billion 4.) increase taxes by $50 billion
1.) Increase taxes by $12.5 billion
Look at the figure Short- and Long-Run Equilibrium II. Which of the following would be the appropriate response on the part of the government upon viewing the state of the economy? 1.) Raise tax rates to close the inflationary gap 2.) Lower tax rates to close the inflationary gap 3.) increase government spending to close the recessionary gap 4.) decrease government spending to close the recessionary gap
1.) Raise tax rates to close the inflationary gap
Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following is the most likely result? 1.) The economy will move int oa recession 2.) Equilibrium real GDP will be more than anticipated 3.) This will not have an adverse effects on the economy, since inflation has been abated 4.) The economy will generate a larger inflationary gap than anticipated
1.) The economy will move into a recession
Over the past few decades in the United States, large federal budget deficits most often have been caused by: 1.) a depressed economy 2.) decreased spending on welfare payments 3.) excessive spending by the state governments 4.) excessive tax increases
1.) a depressed economy
Which of the following is NOT an example of government transfers? 1.) a reimbursement of personal income tax withheld from wages 2.) unemployment insurance 3.) Medicaid-paid prescription drugs for low-income individuals 4.) a Social Security disability pension
1.) a reimbursement of personal income tax withheld from wages
An increase in government spending of $300 billion and a tax cut of $300 billion will have ________ effects on the budget balance and ________ effects on real GDP. 1.) equal; unequal 2.) equal; equal 3.) unequal; unequal 4.) unequal; equal
1.) equal; unequal
Automatic stabilizers are government spending and taxation changes that cause fiscal policy to be ______ when the economy contracts. 1.) expansionary 2.) ineffective 3.) neutral 4.) contractionary
1.) expansionary
Look at the figure Fiscal Policy Choices. If the government uses discretionary fiscal policy for the economy in panel (a) when real GDP is Y1, government spending is likely to be _____ and taxes are likely to be _______. 1.) increased; cut 2.) increased; increased 3.) reduced; cut 4.) reduced; increased
1.) increased; cut
An expansionary fiscal policy: 1.) may include decreases in taxes 2.) usually decreases a government budget deficit or increases a government budget 3.) may include decreases in government spending 4.) may include increases in taxes
1.) may include decreases in taxes
Look at the figure Fiscal Policy Choices. It would be appropriate to use the contractionary fiscal policy to shift the aggregate demand in ________ from ________. 1.) panel (b); AD1 to AD2 2.) panel (b); AD2 to AD1 3.) panel (a); AD2 to AD1 4.) panel (a); AD1 to AD2
1.) panel (b); AD1 to AD2
If there is an inflationary gap in the economy, discretionary fiscal policy will likely include action to: 1.) shift aggregate demand to the left 2.) shift aggregate demand to the right 3.) shift both aggregate demand and short-run aggregate supply to the left 4.) prevent the aggregate demand curve from shifting
1.) shift aggregate demand to the left
The theory of Ricardian equivalence argues that expansionary fiscal policy: 1.) will have no effect on the economy because consumers, anticipating higher taxes to pay for government spending, will decrease spending today to save for the higher taxes. 2.) is not effective because it causes higher interest rates and crowds out investment spending. 3.) is effective, but contractionary fiscal policy is not. 4.) is more effective than expansionary monetary policy.
1.) will have no effect on the economy because consumers, anticipating higher taxes to pay for government spending, will decrease spending today to save for the higher taxes.
If the marginal propensity to save is 0.25, investment spending is $700 million, and the government increases its purchases of goods and services by $100 million, then real GDP increases by: 1.) $175 million 2.) $400 million 3.) $2,800 million 4.) $25 million
2.) $400 million
Look at the figure Short-Run Equilibrium. The economy is in short-run equilibrium. To move the economy to potential GDP, the government should reduce its spending by an amount equal to: 1.) (Y1 - Yp) 2.) (Y1 - Yp)(1 - MPC) 3.) (Y1 - Yp)MPC 4.) (Y1 - Yp) / (1 - MPC)
2.) (Y1 - Yp)(1 - MPC)
If the marginal propensity to consume is 0.9, then the government spending multiplier is: 1.) 0.1 2.) 10 3.) 9 4.) 1.11
2.) 10
Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E2. If there is a decrease in government purchases, ________ will shift to the ________, causing a(n) _______ in the price level and a(n) ________ in real GDP. 1.) AD1; right; decrease; increase 2.) AD2; left; decrease; decrease 3.) AD2; left; increase; decrease 4.) AD1; right; increase; increase
2.) AD2; left; decrease; decrease
Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E2. If there is an increase in taxes ______ will shift to the _______, causing a(n) ________ in the price level and a(n) _________ in real GDP. 1.) AD1; right; increase; increase 2.) AD2; left; decrease; decrease 3.) AD2; left; increase; decrease 4.) AD1; right; decrease; increase
2.) AD2; left; decrease; decrease
Decreasing funding for space exploration will shift the _______ curve to the ________. 1.) short-run aggregate supply; left 2.) aggregate demand; left 3.) short-run aggregate supply; right 4.) aggregate demand; right
2.) aggregate demand; left
Which of the following is an expansionary fiscal policy? 1.) an increase in taxes that reduces the budget deficit and decreases consumption 2.) an increase in unemployment benefits 3.) an increase in the money supply that decreases interest rates 4.) a decrease in government spending
2.) an increase in unemployment benefits
Consider an economy whose households saves 20% of increases in their income. If the government lowers its transfers by $100 billion, then the real GDP will: 1.) decrease by $125 billion 2.) decrease by $400 billion 3.) increase by $125 billion 4.) decrease by $500 billion
2.) decrease by $400 billion
If the marginal propensity to consume is 0.75 and taxes increase by $30 billion, real GDP will: 1.) decrease by more than $120 billion 2.) decrease by less than $120 billion 3.) increase by exactly $30 billion 4.) decrease by exactly $30 billion
2.) decrease by less than $120 billion
Suppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will _______ the _______ effect of the _______ in aggregate demand. 1.) increase; expansionary; increase 2.) decrease; expansionary; increase 3.) increase; contractionary; decrease 4.) decrease; contractionary; increase
2.) decrease; expansionary; increase
When the economy is in a recession, tax receipts _________ and unemployment insurance payments ________. 1.) increase; decrease 2.) decrease; increase 3.) increase; increase 4.) decrease; decrease
2.) decrease; increase
Look at the scenario Fiscal Policy. Suppose the government decides to tax its citizens. The tax multiplier is: 1.) greater than the government spending multiplier 2.) less than the government spending multiplier 3.) impossible to determine 4.) zero, because changes in taxes have no effect on aggregate demand
2.) less than the government spending multiplier
Expansionary fiscal policies: 1.) make the budget deficit smaller 2.) make the budget surplus smaller 3.) affect only taxes 4.) affect only government purchases of goods and services
2.) make the budget surplus smaller
To close an inflationary gap with fiscal policy, the government could: 1.) increase federal subsidies to state universities 2.) reduce budget allocations to interstate highway maintenance 3.) lower the corporate income tax rate 4.) raise the average amount awarded for a disability pension
2.) reduce budget allocations to interstate highway maintenance
All of the following are sources of state and local revenue EXCEPT: 1.) property taxes 2.) social insurance taxes 3.) income taxes 4.) sales taxes
2.) social insurance taxes
Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is a decrease in government transfers, ________ will shift to the ________, causing a(n) ________ in the price level and a(n) _______ in real GDP. 1.) AD2; left; increase; decrease 2.) AD1; left; increase; increase 3.) AD1; left; decrease; decrease 4.) AD2; left; decrease; decrease
3.) AD1; left; decrease; decrease
Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E2. If there is an increase in government transfers, _________ will shift to the ________, causing a(n) ________ in the price level and a(n) _________ in real GDP. 1.) AD1; right; increase; increase 2.) AD1; left; decrease; decrease 3.) AD2; right; increase; increase 4.) AD2; left; decrease; decrease
3.) AD2; right; increase; increase
Suppose the government increases spending more than is necessary to close a recessionary gap. What is the most likely result? 1.) The equilibrium real GDP will fall 2.) The price level will decline 3.) Inflation will increase 4.) The equilibrium real GDP will fall short of potential GDP
3.) Inflation will increase
If _________, expansionary fiscal policy is most likely to crowd out private spending. 1.) aggregate income is $800 billion below its potential level 2.) the unemployment rate is 15% 3.) aggregate income is $500 billion above its potential level 4.) aggregate output is $300 billion below its potential level
3.) aggregate income is $500 billion above its potential level
Which of the following fiscal policies would make a budget surplus smaller or a budget deficit larger? 1.) lower interest rates 2.) lower government transfers 3.) an increase in government purchases of goods and services 4.) higher taxes
3.) an increase in government purchases of goods and services
If the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to ________, which will shift the AD curve to the _________. 1.) decrease government purchases; right 2.) raise tax rates; right 3.) decrease government purchases; left 4.) increase government purchases; left
3.) decrease government purchases; left
Assume that the marginal propensity to consume is 0.8. Government purchases of goods and services increase by $100 billion, financed by a $100 billion tax increase. Real GDP will: 1.) expand by $500 billion 2.) expand by $400 billion 3.) expand by $100 billion 4.) contract by $100 billion
3.) expand by $100 billion
The 2009 U.S. stimulus was a(n) ________ fiscal policy that _______ aggregate demand. 1.) contractionary; decreased 2.) contractionary; increased 3.) expansionary; increased 4.) expansionary; decreased
3.) expansionary; increased
The cyclically adjusted budget deficit: 1.) fluctuates more than the actual budget deficit 2.) remains unchanged throughout the business cycles 3.) fluctuates less than the actual budget deficit 4.) is no different from the actual budget deficit
3.) fluctuates less than the actual budget deficit
Look at the figure Inflationary and Recessionary Gaps. At E1, the economy: 1.) is in equilibrium 2.) has low unemployment 3.) has a recessionary gap 4.) has an inflationary gap
3.) has a recessionary gap
The stability pact signed by many of the countries that adopted the euro limited each member nation's deficit to 3% of GDP. This: 1.) enhanced member countries' ability to conduct monetary policy 2.) did away with budget deficits altogether 3.) limited member countries' ability to use fiscal policy 4.) enhanced member countries' ability to conduct fiscal policy
3.) limited member countries' ability to use fiscal policy
Consumer spending will likely fall if: 1.) government transfers rise 2.) the government lowers tax rates 3.) the government raises tax rates 4.) government transfers rise or tax rates are lowered
3.) the government raises tax rates
If the marginal propensity to save of 0.25, investment spending is $600 million, and the government increases its transfers by $100 million, then real GDP increases by: 1.) $1,800 million 2.) $25 million 3.) $150 million 4.) $300 million
4.) $300 million
Do economists believe that the budget should be balanced each fiscal year? 1.) Yes, a budget should be balanced annually; otherwise persistent budget deficits can cause havoc in the economy 2.) Yes, since the balanced budget multiplier is lager, so it makes the economy grow faster 3.) Yes, as the law states that both the federal and state budgets should always be balanced 4.) No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well
4.) No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well
Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. Look at the scenario Fiscal Policy. Suppose actual real GDP in Arcadia is 500 billion arcs. This economy has: 1.) production at the full employment level 2.) a liquidity trap 3.) an inflationary gap 4.) a recessionary gap
4.) a recessionary gap
Look at the figure Short- and Long-Run Equilibrium II. If the economy is at equilibrium at E1, the government should use _______ fiscal policy to shift the aggregate demand curve to the ______. 1.) expansionary; right 2.) expansionary; left 3.) contractionary; right 4.) contractionary; left
4.) contractionary; left
Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $850 billion, to bring the economy to potential output the government should: 1.) decrease transfers by $50 billion 2.) decrease spending by $50 billion 3.) increase spending by $50 billion 4.) decrease spending by $10 billion
4.) decrease spending by $10 billion
If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _______ government purchases of goods and services by ________. 1.) increase; $100 billion 2.) decrease; $60 billion 3.) decrease; $100 billion 4.) decrease; $40 billion
4.) decrease; $40 billion
Congress increases personal income tax rates to balance the budget. Automatic stabilizers will _______ the _______ effect of the ________ in aggregate demand. 1.) decrease; expansionary; increase 2.) increase; expansionary; increase 3.) increase; contractionary; decrease 4.) decrease; contractionary; decrease
4.) decrease; contractionary; decrease
A recessionary gap can be closed with: 1.) an increase in taxes 2.) contractionary monetary policy 3.) a decrease in government purchases 4.) expansionary fiscal policy
4.) expansionary fiscal policy
An increase in government transfers is an example of _________ fiscal policy because it shifts the aggregate demand curve to the ________ aggregate output. 1.) expansionary; left, increasing 2.) contractionary; left, decreasing 3.) contractionary; right, decreasing 4.) expansionary; right, increasing
4.) expansionary; right, increasing
Discretionary fiscal policy refers to changes in: 1.) interest rates 2.) taxes to account for externalities and control pollution 3.) the money supply 4.) government spending or taxes to close a recessionary or inflationary gap
4.) government spending or taxes to close a recessionary or inflationary gap
Suppose that marginal propensity to consume is equal to 0.9 and the government increases its spending by $200 billion. This increase in spending is financed by a $200 billion increase in taxes. As a result of this, GDP will: 1.) decrease by $200 billion 2.) increase by $2,000 billion 3.) not change at all 4.) increase by $200 billion
4.) increase by $200 billion
Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. Look at the scenario Fiscal Policy. If actual output is 500 billion arcs, to restore the economy to potential output the government should _________ by 25 billion arcs. 1.) decrease spending 2.) increase taxes 3.) decrease taxes 4.) increase spending
4.) increase spending
If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should _________ government purchases of goods and services by ________ 1.) increase; $100 billion 2.) increase; $33 billion 3.) decrease; $100 billion 4.) increase; $25 billion
4.) increase; $25 billion
If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _______ transfer payments by ________ $40 billion. 1.) decrease; more than 2.) increase; less than 3.) decrease; less than 4.) increase; more than
4.) increase; more than
After passage of the American Recovery and Reinvestment Act in 2009 government borrowing ________ and interest rates ________. 1.) increased; increased to record levels 2.) decreased; increased 3.) decreased; decreased 4.) increased; remained very low
4.) increased; remained very low
If overall spending declines and thus the economy contracts, the government could counter this by: 1.) decreasing government transfers 2.) decreasing government spending 3.) raising tax rates 4.) increasing government spending
4.) increasing government spending
Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the marginal propensity to consume is equal to 0.80. The government should _____ taxes by _____ to bring the economy to potential output.
cut; $25 billion
Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. Look at the scenario Fiscal Policy. Suppose that actual output is 700 billion arcs, and the government of Arcadia decides to tax its citizens. To bring the economy to potential output, the government should:
increase taxes by 33.33 billion arcs.
Discretionary fiscal policy may fail to stabilize the economy or may even make the economy less stable because of:
lags in deciding on and implementing a policy change.
Look at the figure Inflationary and Recessionary Gaps. Which of the following measures a recessionary gap? 1.) Y3 - Y1 2.) Y2 - Y1 3.) Y3 - Y2 4.) Y3 - Y0
2.) Y2 - Y1
Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the government should use _______ fiscal policy to shift the aggregate demand curve to the _________. 1.) contractionary; left 2.) expansionary; right 3.) expansionary; left 4.) contractionary; right
2.) expansionary; right
Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is an increase in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.
AD1; right; increase; increase
Suppose the economy is operating at an output level of $5,400 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this inflationary gap.
Decreasing government purchases of goods and services by $100 billion
Expansionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.
right; recessionary
If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should ________ taxes by _______. 1.) increase; less than $25 billion 2.) decrease; more than $25 billion 3.) increase; more than $25 billion 4.) increase; more than $25 billion
2.) decrease; more than $25 billion
Look at the figure Inflationary and Recessionary Gaps. At E3, the economy: 1.) has a recessionary gap 2.) has an inflationary gap 3.) is in equilibrium 4.) is stagnating
2.) has an inflationary gap
If the marginal propensity to consume is 0.9, then the tax multiplier will be: 1.) zero, because there is not multiplier effect from taxes 2.) less than 10 3.) impossible to determine 4.) greater than 10
2.) less than 10
Which of the following is NOT a government transfer payment? 1.) Social Security 2.) Medicaid 3.) the federal payroll 4.) Medicare
3.) the federal payroll
