ECON 112

Ace your homework & exams now with Quizwiz!

What is the cyclically adjusted budget deficit or​ surplus?

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

What is the difference between the federal budget deficit and federal government​ debt?

The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.

Who is responsible for fiscal​ policy?

The federal government controls fiscal policy.

​Westville, a small developed​ country, is experiencing a very high rate of inflation. Roma​ Anderson, a market research​ analyst, thinks that the high level of inflation is due to an acute shortage of goods available in the economy. According to​ her, the government should use expansionary fiscal policies to boost the economy.​ Meanwhile, Robert​ Simpson, a member of the finance​ ministry, is of the opinion that the high level of inflation is the result of excessive household spending. He suggests that the government should increase personal income tax rates to curb consumption demand. Which of the​ following, if​ true, will strengthen​ Robert's claim that high consumer spending is the cause of high​ inflation?

There is consensus among leading economists and industry experts that the output gap in Westville is currently negative.

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending?

Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending.

Why do few economists argue that it would be a good idea to balance the federal budget every​ year?

To keep a balanced budget during a​ recession, taxes would have to increase and government expenditures would have to​ decrease, which would further reduce aggregate demand and deepen the recession.

According to a study by Kanishka Misra of the University of Michigan and Paolo Surico of the London Business​ School, "Almost half of American families did not adjust their consumption following receipt of the ... 2008 tax​ rebate." ​ Source: Kanishka Misra and Paolo​ Surico, "Consumption, Income​ Changes, and​ Heterogeneity: Evidence from Two Fiscal Stimulus​ Programs," American Economic​ Journal: ​ Macroeconomics, Vol.​ 6, No.​ 4, October​ 2014, pp.​ 84-106. In​ general, we expect that people will increase their consumption The 2008 tax cut made it more likely that people would not respond by increasing their consumption spending because it was a

if their disposable income increases ​one-time tax cut that affected​ current, not​ permanent, income.

Writing in the Wall Street Journal​, Martin​ Feldstein, an economist at Harvard​ University, argues​ that: ​"behavioral responses" of taxpayers to the cuts in marginal tax rates enacted in 1986 resulted in​ "an enormous rise in the taxes​ paid, particularly by those who experienced the greatest reductions in marginal tax​ rates." ​Source: Martin​ Feldstein, "The Tax Reform Evidence from​ 1986," Wall Street Journal​, October​ 24, 2011. Cuts in marginal tax rates will What does Feldstein mean by a​ "behavioral response" to tax​ cuts? The behavioral response will be that people in

increase marginal​ net-of-tax income, increase the supply of labor and increase total taxes as people work longer hours. higher tax brackets will experience an increase in taxable income and thus will work more.

In a closed​ economy, increase in government borrowing are likely​ to: The result of increased government borrowing in a closed economy is likely to​ be: In an open economy like the United​ States, the government has increased borrowing significantly without causing these effects​ because:

increase the interest rate reductions in investment and purchases of consumer durable goods the U.S. can borrow from savers abroad

When you pay required Social Security taxes from your​ paycheck, the money goes​ to:

someone who is receiving Social Security now

As the tax rate increases,

the multiplier effect decreases

The goal of expansionary fiscal policy is

to decrease aggregate demand

Suppose the government increases expenditures by ​$12120 billion and the marginal propensity to consume is 0.880. By how much will equilibrium GDP​ change? The change in equilibrium GDP​ is: ​

$600 billion

The graph to the right illustrates the static​ AD-AS model. Suppose the economy is initially in​ long-run equilibrium at point A. The government decides to increase taxes. In the​ short-run, this contractionary fiscal policy will​ cause:

A shift from AD2 to AD1 and a movement to point D, with a lower price level and lower output

What is the​ "tax wedge"?

A tax wedge is the difference between the pretax and posttax return to an economic activity. For​ example, a tax on interest income would decrease the posttax return to investment.

What is fiscal​ policy?

Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives

The term​ "crowding out" refers to a situation​ where:

Government spending increases interest rates and decreases private investment.

An article in the Wall Street Journal discussing the Trump​ administration's goal of increasing the annual rate of growth in real GDP to 3 percent noted​ that: "Two stubborn obstacles stand in his way. The work force​ isn't producing enough new​ workers, and the productivity of those working​ isn't growing fast​ enough." ​Source: Nick Timiraos and Andrew​ Tangel, "Can Trump Deliver​ 3% Growth? Stubborn Realities Stand in the​ Way," Wall Street Journal​, May​ 15, 2017. Which of the following equations explains the reasoning behind this​ statement? The number of new workers directly affects

Growth rate of real GDP =Growth rate of hours worked+Growth rate of labor productivity. the number of hours worked.

Suppose that the economy is currently at potential​ GDP, and the federal budget is balanced. If the economy moves into​ recession, what will happen to the federal​ budget?

If the budget is balanced at potential GDP and the economy moves into​ recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.

Consider the figure to the right. An increase in government spending shifted the aggregate demand curve from AD 1 to AD 2.As a​ result, both price level and real GDP increased. What can be​ said, however, about the increase in real​ GDP?

It increased by less than indicated by a multiplier with a constant price level.

A policy of cutting the corporate income tax to increase investment spending is intended to result​ in:

Long run supply side effects

The federal government collected less in total individual income taxes in 1983 than in 1982. Can we conclude that Congress and the president cut individual income tax rates in​ 1983?

No. It could be that the economy​ contracted, so less income was earned and less was paid in tax.

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.

What is meant by​ supply-side economics?

Supply-side economics refers to the use of taxes to increase incentives to​ work, save,​ invest, and start a business in order to increase​ long-run aggregate supply.

In the long​ run, government tax policy can affect private investment which impacts the production function and factors of production. In other​ words, aggregate supply may be impacted by different types of taxes the government can use. Which of the following is not true in terms of potential long run impacts of tax​ policies?

A tax rebate given one year will cause people to have more money and therefore they will spend more which will cause an increase in aggregate supply.

Which can be changed more​ quickly: monetary policy or fiscal​ policy?

Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.

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

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

When actual GDP is below potential GDP the budget deficit increases because​ of:

an increase in transfer payments and a decrease in tax revenues

​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

_________are spending by the government on​ goods, services, and factors of production. ________ represent total government spending including​ goods, services, grants to state and local​ governments, and transfer payments Since the​ 1950s, total government​ expenditures, as a percentage of​ GDP, have______ and total government​ purchases, as a percentage of​ GDP, have _______ The major cause of these trends is

government purchases government expenditures increased decreased there has been major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance

Wall Street Journal writers Josh Zumbrun and Nick Timiraos published answers to several of their​ readers' questions regarding the federal​ government's debt. Two of the questions​ were: "Why is government debt different from​ mine?" and​ "How important is it to pay off this​ debt?" ​Source: Josh Zumbrun and Nick​ Timiraos, "Q&A: What the​ $18 Trillion National Debt Means for the U.S.​ Economy," Wall Street Journal​, February​ 1, 2015. Government debt is different from household debt because How important is it to pay off this​ debt?

households cannot tax to bring in revenue and so will default if they​ can't make the payments. Not very important if the debt is at a sustainable​ level, and the interest payments are relatively constant.

As indicated in the​ chapter, the CBO forecast that real GDP would grow at an average annual rate of 1.9 percent from 2017 to 2027. The Trump administration pledged to raise the growth rate to 3​ percent, although some policymakers and economists were skeptical that this goal could be achieved. Yet from 1960 to​ 1969, real GDP grew at an average annual rate of 4.5 percent. All of the following are factors that make growth rates that high more difficult to achieve today except

increases immigration

Which of the following raises the largest percentage of federal government​ revenue?

individual income taxes

Some economists argue that because increases in government spending crowd outLOADING... private​ spending, increased government spending will reduce the​ long-run growth rate of real GDP. a. This is most likely to happen if the private spending being crowded out is b. In terms of its effect on the​ long-run growth rate of real​ GDP, it is likely to matter more if the additional government spending involves

investment spending increases spending on highways and bridges

The graph to the right shows a situation in which the economy was in equilibrium at potential GDP​ (at point​ A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential​ GDP?

Increase government spending or decrease taxes.

Suppose the government increases taxes by ​$330 billion and the marginal propensity to consume is 0.50. By how will equilibrium GDP​ change?

The change in equilibrium GDP​ is: ​$-30.0 billion.

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​ consumption, investment, and net exports to​ ___________.

increase; decrease

In The General Theory of​ Employment, Interest, and Money​, John Maynard Keynes wrote​ this: ​"If the Treasury were to fill old bottles with​ banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town​ rubbish, and leave it to private enterprise...to dig the notes up again... there need be no more unemployment​ and, with the help of the​ repercussions, the real income of the community...would probably become a good deal greater than it​ is." In this​ statement, Keynes is discussing the important macroeconomic effect called the ........... effect. By​ repercussions, Keynes means that an initial increase in autonomous expenditures will Keynes appears unconcerned if government spending is wasteful because

-multiplier -change production by an amount greater than the initial increase in autonomous expenditures -it will still lead to an increase in production and employment.

Which of the following is an example of an expansionary fiscal​ policy? Suppose the government decreases taxes. Use the aggregate demand and aggregate supply model to show the effects of the decrease in taxes on the economy. ​1.) Use the line drawing tool to show the effect of the decrease in taxes on the AD or AS curve. Properly label this line. ​2.) Use the point drawing tool to show the new ​short-run equilibrium. Label this point​ 'B'.

A decrease in taxes.

Which of the following statements about the federal debt is​ correct?

If the debt becomes very large relative to the​ economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt.

Which of the following accurately defines the government purchases multiplier and the tax​ multiplier?

The Government purchases multiplier equals (change in equilibrium real GDP)/(change in government purchases) Tax Multiplier equals (change in equilibrium real GDP)/(change in taxes)

If the​ short-run aggregate supply curve​ (SRAS) were a horizontal​ line, what would be the impact on the size of the government purchases and tax multipliersLOADING...​?

The impact of the multiplier would be larger if the SRAS curve is horizontal.

U.S. federal government expenditures are comprised of purchases of goods and services​ (defense spending plus spending on all​ day-to-day activities), transfer​ payments, interest​ payments, and grants to state and local governments. Which of the following statements is​ true?

Transfer payments are the largest component of the federal budget​ (about 50%) followed by defense spending​ (about 20%), while spending on all its​ day-to-day activities is the smallest component​ (about ​8%).

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not​ increase?

Yes, because fiscal policy and monetary policy are separate things.

Economist Mark Thoma has​ written, "One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement. ... Automatic stabilizers bypass this difficulty by doing exactly what their name​ implies." ​ Source: Mark​ Thoma, "The Importance of Automatic Stabilizers to the​ Economy," cbsnews.com​, January​ 25, 2010. Automatic stabilizers are Two examples of automatic stabilizers in the U.S. are Automatic stabilizers can reduce the severity of a recession​ because, during a​ recession,

government spending and taxes that automatically increase or decrease along with the business cycle. unemployment insurance payments and the progressive income tax system unemployment payments rise and tax collections​ fall, providing more spending ability to push the economy back to full employment.

Suppose the government increases expenditures while holding taxes the same. This will............... deficits or................ surpluses. Assume the increase in government​ expenditures, from​ above, occurs. As a result of the increase in government​ expenditures, the The new equilibrium will be The increase in government expenditures will the interest​ rate, which will cause in private investment​ spending, and is referred to as

increase decrease money demand curve will shift right where the new money demand curve intersects the original money supply curve increase decrease crowding out

Suppose the government reduces the corporate income tax rate. This will increase the return to firms for​ investing, which should.... investment and cause....in capital in the long run. Show the​ long-run effect of this reduction in corporate tax rates on​ long-run aggregate supply. ​1.) Use the line drawing tool to show the effect on ​ long-run aggregate supply. Properly label this line. ​2.) Use the point drawing tool to show the new​ long-run equilibrium on the graph. Label this point​ 'B'. The​ long-run impact of a reduction in corporate tax rates would be

increase an increase an increase in long-run potential output while actually reducing inflation

Imagine a graph that shows a situation in which the economy was in equilibrium at potential GDP​ (at point​ A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential​ GDP? As a result of the​ government's actions, the The new equilibrium will be

increase government spending or decrease taxes aggregate demand curve will shift right. where the new aggregate demand curve intersects the original​ short-run aggregate supply​ curve, on the​ long-run aggregate supply curve.

Consider the following​ statement: ​"Real GDP is currently​ $17.7 trillion, and potential real GDP is​ $17.4 trillion. If Congress and the president would decrease government purchases by​ $300 billion or increase taxes by​ $300 billion, the economy could be brought to equilibrium at potential​ GDP." If government purchases were to decrease by​ $300 billion or if taxes were increased by​ $300 billion, the equilibrium level of real GDP would decrease by

more than​ $300 billion Therefore, the statement above is incorrect

The corporate income tax rate is increased. This is Defense spending is increased. This is The Federal Reserve lowers the target for the federal funds rate. This is Families are allowed to deduct all their expenses for daycare from their federal income taxes. This is The individual income tax rate is decreased. This is

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

Economists believe that the smaller the tax wedge for any economic​ activity, such as​ working, saving,​ investing, or starting a​ business,

the more of that economic activity that will occur

A Federal Reserve publication argues that the size of the multiplier​ "depends on the type of fiscal policy changes in question and the environment in which they are​ implemented." ​Source: Daniel J.​ Wilson, "Government​ Spending: An Economic​ Boost?," Federal Reserve Bank of San Francisco Economic Letter​, February​ 6, 2012. In referring to ​"the type of fiscal policy changes in​ question," the author recognizes that The type of policy matters for the size of the multiplier because The reference to​ "the environment in which they are​ implemented" is a recognition that The size of the multiplier could be affected by how close real GDP is to potential GDP because

the tax multiplier is different from the government purchases multiplier. households may not spend all of the saved taxes when there is a tax​ cut, but an increase in government spending will increase aggregate demand by the full amount. changes in government spending can be offset or reinforced by monetary policy, and that the impacts will be different at different phases of the business cycle The effects are more positive during recessions than during inflations.


Related study sets

CGS2518 EXAM 1, PT 2, EXCEL PORTION

View Set

1. Basic Insurance Concept and Principles

View Set

Kinesiology Chapter 6 Study Guide

View Set