Chapter 27 Review

Crowding out

A decline in private expenditures as a result of an increase in government purchases.

Fical Policy

Changes in federal taxes and purchases that are intended to achieve macroeconomics policy objectives.

What is the relationship between government purchases and government expenditures?

Government expenditures include government purchases.

Automatic Stabilizer

Government spending and taxes that automatically increase and decrease along with the business cycle.

Which of the following is true of any permanent increase in government purchases in the long run?

In the long run, any permanent increase in government purchases must come at the expense of private expenditures.

Assume that the absolute size of the government purchases multiplier is larger than the absolute size of the tax multiplier. What happens to equilibrium real GDP if the government increases both government purchases and taxes by the same amount?

Real GDP will increase.

How would you decompose the total effect of an increase in government purchases on the aggregate demand curve?(Note: the magnitudes of the shifts do not have to be the same.)

The aggregate demand curve shifts as a result of two distinct effects, twice to the right.

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 purchases; therefore, aggregate demand remains unchanged.

Cyclically adjusted budget deficit or surplus

The deficit or surplus in the federal government's budget if the economy were at potential GDP.

Which of the following statements is true about using fiscal policy to stabilize the economy?

The delay caused by the legislative process id typically longer for fiscal policy than for monetary policy.

Tax Wedge

The difference between the pretax and posttax return to an economic activity.

Which of the following is the main reason for the long-run funding problems of Social Security?

The number of workers per retiree continues to decline.

Which of the following statements in incorrect?

The only difference between fiscal policy and monetary policy in fighting recessions and stimulating spending where the money comes from.

Multiplier Effect

The series of induced increases in consumption spending that results from an initial increase in autonomous expenditures.

Budget Deficit

The situation in which the government's expenditures are greater than its tax revenue.

Budget Surplus

The situation in which the government's expenditures are less than its tax revenue.

If the government cuts taxes in order to raise aggregate demand in the economy, the action is called

a discretionary policy

The multiplier effect consists of

a series of induced increases in consumption spending that result from an initial increase in autonomous expenditures.

Which of the following fiscal policy actions will increase real GDP in the short run?

an increase in government expenditures

Which of the following is an example of an automatic stabilizer?

an unemployment benefit program

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

automatic stabilizers

If the federal government's expenditures are greater than its revenue, there is a

budget deficit.

Fiscal policy refers to

changes in federal taxes and spending that are intended to achieve macroeconomic policy goals.

Fill in the blanks. An attempt to reduce inflation requires ________ fiscal policy, which causes real GDP to ________ and the price level to ________.

contractionary; fall; fall

By how much will equilibrium real GDP change as a result of a $50 billion decrease in government purchases?

decrease by more than $50 billion

When the tax rate increases, the size of the multiplier effect _______.

decreases

Which of the following is the largest category of federal government expenditures, excluding transfer payments?

defense spending

When the government takes actions to change taxes and spending, the type of policy involved is called

discretionary fiscal policy

The tax multiplier equals the change in

equilibrium GDP divided by the change in taxes

The American Recovery and Reinvestment Act of 2009 is a clear example of

expansionary fiscal policy

Which of the following was a period of federal budget surpluses?

from 1998 through 2001

When the economy is in a recession, the government can

increase government purchases or decrease taxes in order to increase aggregate demand.

Budget deficits automatically _________ during recessions and ________ during expansions.

increase; decrease

Fill in the blanks. 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 some consumption, investment, and net exports to _______.

increase; decrease

Which of the following are the largest sources of federal government revenues?

individual income taxes and social insurance taxes

The cyclically adjusted budget deficit,

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

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

only the federal government.

Fill in the blanks. Increases in government purchases and decreases in taxes have a ________ multiplier effect on equilibrium real GDP, and decreases in government purchases and increases in taxes have a ________ multiplier effect on equilibrium real GDP.

positive; negative

Which of the following will reduce the inflation rate?

reducing government purchases or increasing taxes

We would expect the tax multiplier to be ________ in absolute value than the government purchases multiplier.

smaller

The U.S government increased spending for defense and homeland security after 2001 to fund the war on terrorism and the invasion of Iraq. These spending increases are considered

strictly fiscal policy

Spending on most of the federal government's day-to-day activities - including running federal agencies like the Environmental Protection Agency, the FBI, the National Park Service, and the Immigration and Customs enforcement - make up

less than 10 percent of the federal government's expenditures.

Crowding refers to

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

The goal of expansionary fiscal policy is

to increase aggregate demand

The largest and fastest growing category of federal expenditures is

transfer payment