Chapter 16

If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06​, we would expect the federal government to pursue​ a(n)

Contractionary Actual real GDP decreases Potential real GDP does not change Price level decreases Unemployment increases

Suppose the economy is in equilibrium in the first period at point​ (A). In the second​ period, the economy reaches point​ (B). We would expect the federal government to pursue what type of policy in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium​ (point C) in the second​ period?

Expansionary Fiscal Policy Actual real​ GDP: increases Potential real​ GDP: does not change Price​ level: increases ​Unemployment: decreases

What are the gains to be had from simplifying the tax​ code?

Greater clarity of the decisions made by households and firms. Increased efficiency of households and firms. Resources from the tax preparation industry freed up for other endeavors.

Policy that is specifically designed to affect aggregate supply and increase incentives to​ work, save, and start a​ business, by reducing the tax wedge LOADING... is called

​supply-side economics.

Identify each of the following​ as: ​(i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy.

-part of a contractionary -fiscal policy -not part of fiscal policy -not part of fiscal policy -not part of fiscal policy -part of an expansionary -fiscal policy

1.) From an understanding of the multiplier​ process, explain why an increase in the tax rate would decrease the size of the government purchases multiplier. 2.) The value of the government purchases multiplier would decrease because in the formula for the multiplier the denominator is

1.) the MPC is multiplied by (1-t) 2.) 1-[MPCx(1-t)-MPI]

1.) The government purchases multiplier can have a value greater than zero and less than 1 if 2.) Why does an estimate of the size of the multiplier matter in evaluating the effects of an expansionary fiscal​ policy?

1.) the marginal propensity to consume is negative. 2.) The larger the​ multiplier, the greater the effects of an expansionary fiscal policy.

Complete the following table for a static​ AD-AS model:

Decreases taxes - Rise Decreases gov't spending - fall

Consider the figures below. Determine which combination of fiscal policies shifted AD 1 to AD 2 in each figure and returned the economy to​ long-run macroeconomic equilibrium.

Example​ (A): Expansionary fiscal policy. Example​ (B): Contractionary fiscal policy.

Suppose the economy is in equilibrium in the first period at point​ (A). In the second​ period, the economy reaches point​ (B). What policy would the federal government likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium​ (point C) in the second​ period?

Increase government spending

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

How does a budget deficit LOADING... act as an automatic stabilizer and reduce the severity of a​ recession?

Transfer payments to households increase. Consumers spend more than they would in the absence of social insurance​ programs, like unemployment. During​ recessions, tax obligations fall due to falling wages and profits.

When is it considered​ "good policy" for the government to run a budget​ deficit?

When borrowing is used for​ long-lived capital goods.

​One-time tax​ rebates, such as those in 2001 and​ 2008, increase consumption spending by less than a permanent tax cut because​ one-time tax rebates increase

current income

As a result of crowding out LOADING... in the short​ run, the effect on real GDP of an increase in government spending is often

less than the increase in government spending.

Briefly explain whether each of the following is an example of​ (1) a discretionary fiscal​ policy, (2) an automatic​ stabilizer, or​ (3) not a fiscal policy. The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of

not a fiscal policy. not a fiscal policy. an automatic stabilizer. an automatic stabilizer. not a fiscal policy. a discretionary fiscal policy.

Increased government debt can lead to higher interest rates​ and, as a​ result, crowding out of private investment spending. In terms of borrowing​ (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the​ economy?

​Debt-spending on research and development. ​Debt-spending on highways and ports. ​Debt-spending on education.