Chapter 21 study guide
If the marginal propensity to consume is 0.9, by how much will $100 of government spending increase GDP?
$1,000
When the Federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is:
Discretionary Fiscal Policy
A decrease in government spending and a cut in taxes would be a pair of fiscal policies that reinforce each other
False
Expansionary fiscal policy tends to lead to a smaller budget deficit
False
A Federal budget deficit exists when
Federal government spending exceeds tax revenues
Which of the following is an important real consequence of the public debt of the United States?
Its consequent higher interest rates lead to fewer incentives to bear risk and innovate
Which three U.S. presidents implemented well-known tax cuts designed to stimulate aggregate demand?
John F. Kennedy, Ronald Reagan, and George W. Bush
Which U.S. presidents reduced marginal tax rates to promote work and business risk taking?
Kennedy and Clinton
An expansionary fiscal policy can be illustrated by a
Leftward shift in the aggregate supply curve
In Year 1, the actual budget deficit was $150 billion and the cyclically-adjusted deficit was $125 billion. In Year 2, the actual budget deficit was $130 billion and the cyclically-adjusted deficit was $125 billion. It can be concluded that discretionary fiscal policy from Year 1 to Year 2 was:
More contractionary
If the government wishes to increase the level of real GDP, it might reduce
Taxes
Which would tend to reduce the crowding-out effect that occurs when the Federal government increases its borrowing to finance a deficit?
The economy is operating at less than full employment
The public debt is the:
Total of all past deficits minus all past surpluses
Legislators debate for six months on which spending programs to utilize to manipulate the business cycle. This is an example of the
decision lag.
Which are examples of automatic stabilizers?
income tax revenues and transfer payments
As GDP increases, tax revenues _____, which in turn ______ GDP growth.
increase; restrains
A change in aggregate demand due to an increase in transfer payments is equivalent in the aggregate expenditure model to:
An upward shift in the aggregate expenditures schedule
The economic burden of World War II for the United States was primarily:
Borne by the persons who lived during the war period
How is the public debt calculated?
By cumulating the annual difference between tax revenues and government spending over the years
If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n)
Contractionary fiscal policy
A given reduction in government spending will dampen demand-pull inflation by a greater amount when the:
Economy's MPC is large
An increase in the public debt and its subsequent repayment will tend to
Mildly increase the income inequality in the U.S.
As the economy declines into recession, the collection of personal income tax revenues automatically falls. This relationship best describes how the progressive income tax system
Serves as an automatic stabilizer for the economy
As GDP decreases, tax revenues _____, causing a _______ to aggregate demand.
decline; stimulus
When a firm can _____ its capital equipment over a shorter period, it cuts its taxes _____.
depreciate; now
The $787 billion stimulus package passed in the United States in 2009 focused more on spending than on taxes partly because:
increased spending leads to a larger increase in GDP than the same reduction in taxes.
Which of the following policies do supply-side economists believe is the best for increasing the standard of living?
increasing investment in capital that boosts worker productivity
Which of the following measures is an example of an expansionary fiscal policy?
increasing unemployment compensation
The Laffer curve has which variables on its axes?
tax rates and tax revenue
If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be
Increased government spending or decreased taxation, or a combination of the two actions
Most studies estimate the overall multiplier of the 2009 stimulus to be between:
1.5 and 2.
Fiscal policy is enacted through changes in
Taxation and government spending
State and local governments are limited in their ability to respond to recessions because of:
Constitutional and other requirements to balance their budgets
Assume that the economy is in a recession and there is a budget deficit. A strict balanced-budget amendment that would require the Federal government to balance its budget during a recession would be
Contractionary and worsen the effects of the recession
If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement:
Countercyclical fiscal policy
The Social Security Program is designed to pay
Current retirees using funds from current contributions
The intent of contractionary fiscal policy is to
Decrease aggregate demand
Which of the following is an example of built-in stability? As real GDP decreases, income tax revenues
Decrease and transfer payments increase
You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?
Decrease government spending and increase taxes
The effect of an increase in the government budget deficit on the equilibrium level of GDP is essentially the same as a(n):
Decrease in consumption
Actions by the Federal government that decrease the progressivity of the tax system
Decrease the effect of automatic stabilizers
The goal of expansionary fiscal policy is to rein in inflation
False
When the Federal government uses taxation and spending actions to stimulate the economy it is conducting:
Fiscal Policy
The following are important problems associated with the public debt, except:
Government borrowing to finance the debt may lead to too much private investment
The crowding-out effect arises when
Government borrows in the money market, thus causing an increase in interest rates
A Federal budget deficit is financed by the
Government issuance or sale of Treasury securities
Automatic stabilizers smooth fluctuations in the economy because they produce changes in the government's budget that:
Help offset changes in GDP
You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP-gap here?
Increase government spending and decrease taxes
Assume the economy is at full employment but planned investment exceeds saving. Other things being equal, what fiscal policy actions would best address this problem?
Increase taxes and decrease government spending
Which combination of fiscal policy actions would most likely be offsetting?
Increase taxes and government spending
The crowding-out effect suggests that:
Increases in government spending may reduce private investment
__________ government spending, _____ transfer payments, and ____ taxes are all examples of expansionary fiscal policy.
Increasing; increasing; lowering
Which of the following illustrates the information lag?
The economy is predicted to increase at 0.1% in July, but the numbers are revised in August to reflect an actual 2% decrease.
A major concern with the Social Security trust fund is that:
The fund will be insufficient to cover obligations in one or two decades
One important reason why the United States government is not likely to go bankrupt even with a large public debt is that it has:
The power to print money to finance the debt
Which of the following serves as an automatic stabilizer in the economy?
The progressive income tax
A major reason that the public debt cannot bankrupt the Federal government is because
The public debt can be easily refinanced
When government spending is increased, the amount of the increase in aggregate demand primarily depends on:
The size of the multiplier
One timing problem with fiscal policy to counter a recession is an "operational lag" that occurs between the:
Time fiscal action is taken and the time that the action has its effect on the economy
One timing problem with fiscal policy to counter a recession is an "administrative lag" that occurs between the
Time the need for the fiscal action is recognized and the time that the action is taken
The so-called "negative taxes" are better known as
Transfer payments
Up until 2008, Social Security revenues exceeded payouts, and the excess inflow was used to buy
Treasury securities
Built-in stability refers to the fact that with a progressive tax system, net tax revenues vary directly with the level of GDP.
True
Expansionary fiscal policy during a recession means cutting taxes, increasing government spending, or taking both actions.
True
If the government wants to reduce unemployment using fiscal policy, it may do so by increasing government spending.
True
The flexibility of the price level tends to dampen the multiplier effect of fiscal policy.
True
If people expected that a tax cut was temporary, then this fiscal policy's effect on the economy will tend to be:
Weaker
An automatic stabilizer
is exemplified by a program such as unemployment compensation.
The lag between the time the need for fiscal action is recognized and the time action is taken is referred to as the
Administrative lag
The crowding-out effect works through interest rates to
Decrease the effectiveness of expansionary fiscal policy
If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the:
Economy's MPS is small
_____ involves increasing government spending, increasing transfer payments, and/or decreasing taxes.
Expansionary fiscal policy
__________ government spending, _____ transfer payments, and ____ taxes are all examples of contractionary fiscal policy.
Reducing; reducing; raising
Crowding out is a decrease in private investment caused by:
An expansionary fiscal policy
Which economist promoted the idea that reducing tax rates can increase tax revenue?
Arthur Laffer
If the crowding-out effect is at its maximum strength, it follows that an increase in government spending would:
Not affect aggregate demand and GDP
If you are told that the government had an actual budget deficit of $50 billion, then you would:
Not be able to determine the direction of fiscal policy from the information given
A public debt which is owed to foreigners can be burdensome because
Payment of interest reduces the volume of goods and services available for domestic uses
The crowding-out effect from government borrowing to finance the public debt is reduced when
Public investment complements private investment
The goal of expansionary fiscal policy is to increase
Real GDP
The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n):
Recognition lag
If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n)
Expansionary fiscal policy
The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending would:
Decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy
Due to automatic stabilizers, when income rises, government transfer spending
Decreases and tax revenues increase
Most of the public debt is owed to the nation's citizens and domestic institutions. This is one reason that the public debt:
Does not impose a large burden on future generations
In Year 1, the actual budget deficit was $200 billion and the cyclically-adjusted deficit was $150 billion. In Year 2, the actual budget deficit was $225 billion and the cyclically-adjusted deficit was $175 billion. It can be concluded that fiscal policy from Year 1 to Year 2 became more:
Expansionary
A decrease in taxes is one of the options that can be used to pursue a contractionary fiscal policy.
False
One of the potential consequences of the public debt is that it may
Lead to additional future taxes that reduce economic incentives
__________ marginal tax rates and _______________ are commonly used to increase aggregate supply.
Lowering; offering investment tax credits
The two reasons why bankruptcy is a false concern regarding the public debt are
Refinancing and taxation
Contractionary fiscal policy would tend to make a budget deficit become
Smaller
One timing problem with fiscal policy to counter a recession is a "recognition lag" that occurs between the
Start of the recession and the time it takes to recognize that the recession has started
The Federal budget deficit is calculated each year by:
Subtracting government spending from government revenues