ECON Ch 31

Which of the following represents the most contractionary fiscal policy?

A $30 billion decrease in government spending.

Which of the following is not considered a legitimate concern of a large public debt?

Bankruptcy of the federal government.

Which of the following statements is correct?

Built-in stability only partially offsets fluctuations in economic activity.

Which of the following is considered a legitimate concern of a large public debt?

Crowding-out of private investment.

Demand-pull inflation can be restrained by increasing government spending and reducing taxes.

False

Picture Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with:

a contractionary fiscal policy.

Picture Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing:

a negative GDP gap.

Picture Refer to the data for a fictional economy. The changes in the budget conditions between 1998 and 1999 best reflect:

a recession.

Picture (Advanced analysis) Refer to the diagram, in which C3 is the before-tax consumption schedule. The after-tax consumption schedule represented by C2 reflects:

a regressive tax system.

An appropriate fiscal policy for severe demand-pull inflation is:

a tax rate increase.

Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward:

an excess of government expenditures over tax receipts.

Answer the question using the following budget information for a hypothetical economy. Assume that all budget surpluses are used to pay down the public debt. Picture Refer to the data. As a percentage of GDP, the:

budget surplus was less than 1 percent in year 6.

Picture Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The equilibrium level of GDP in this economy:

cannot be determined from the information given.

Picture Refer to the diagram. The degree of built-in stability in the economy could be increased by:

changing the tax system so that the tax line has a greater slope.

Picture Refer to the diagram. Assume that G and T1 are the relevant curves and that the economy is currently at B, which is its full-employment GDP. This economy has a:

cyclically adjusted budget surplus and an actual budget surplus.

Suppose the federal government had budget surpluses of $80 billion in year 1 and $120 billion in year 2 but had budget deficits of $10 billion in year 3 and $40 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government's public debt would have:

decreased by $150 billion.

Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should:

increase government expenditures by $50 billion.

Picture Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to:

increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.

Suppose the federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government's public debt would have:

increased by $20 billion.

An economist who favored expanded government would recommend:

increases in government spending during recession and tax increases during inflation.

If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by:

increasing taxes by $20 billion.

The average tax rate required to service the public debt is roughly measured by:

interest on the debt as a percentage of the GDP.

Expansionary fiscal policy is so named because it:

is designed to expand real GDP.

Payment of interest on the U.S. public debt:

is thought to increase income inequality.

Picture Refer to the diagram. Assume that G and T1 are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a(n):

neither a surplus nor deficit in the actual budget.

Picture Other things equal, an increase of corporate bonds from $140 billion to $150 billion in the economy would:

not change the size of the public debt.

Picture Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to:

reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.

(Advanced analysis) Answer the question on the basis of the following before-tax consumption schedule for an economy: Picture Refer to the data. A 10 percent proportional tax on income would:

reduce the size of the multiplier and make the economy more stable.

A major advantage of the built-in or automatic stabilizers is that they:

require no legislative action by Congress to be made effective.

An economist who favors smaller government would recommend:

tax cuts during recession and reductions in government spending during inflation.

Picture Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. In this economy:

tax revenues vary directly with GDP, but government spending is independent of GDP.

If the economy has a cyclically adjusted budget surplus, this means that:

tax revenues would exceed government expenditures if full employment were achieved.

Since actual budget deficits surpassed 10 percent of GDP in 2009:

the deficits as a percentage of GDP have fallen, but fiscal policy has remained expansionary.

The immediate primary cause of the swing from federal budget surpluses in 2000 and 2001 to a budget deficit in 2002 was:

the recession of 2001.

Which of the following is the best example of public investment?

Construction of highways.

Picture Refer to the diagram. If the full-employment level of GDP is D, then it would be appropriate fiscal policy for government to:

increase spending and decrease taxes.

Contractionary fiscal policy is so named because it:

is aimed at reducing aggregate demand and thus achieving price stability.

The real burden of an increase in the public debt:

may be very small or conceivably zero when the economy is in a severe depression.

(Last Word) In 1960 the ratio of workers to Social Security and Medicare beneficiaries was ______; by 2040 it is projected to be _________.

5:1; 2:1

Answer the question on the basis of the following before-tax consumption schedule for a closed economy: Picture Refer to the data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is now imposed in this economy, the consumption schedule will be:

GDP C 0 8 100 88 200 168 300 248 400 320

(Advanced analysis) Answer the question on the basis of the following before-tax consumption schedule for an economy: Picture Refer to the data. If a 10 percent proportional tax on income is imposed, the consumption schedule will now be:

GDP C 100 134 200 188 300 242 400 296 500 350

Picture Refer to the diagrams. Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD1 to AD2 and thereby to increase GDP from X to Z. In terms of graph B, which of the following might explain why GDP increases to Y rather than to Z?

Offsetting state and local finance.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

Reductions in federal tax rates on personal and corporate income.

Picture Refer to the diagram. Which tax system will generate the largest cyclical deficits?

T1.

If the MPC in the economy is .75, government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion.

True

The crowding-out effect of the public debt may be dampened if the investment-demand curve is shifting to the right.

True

Picture Refer to the diagram. The equilibrium level of GDP is:

Y4.

An appropriate fiscal policy for a severe recession is:

a decrease in tax rates.

Picture Refer to the diagram, where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the:

actual budget deficit exceeds the cyclically adjusted budget deficit.

Picture In the diagram, it is assumed that investment, net exports, and government purchases:

are independent of the level of GDP.

Suppose the price level is fixed, the MPC is .8, and the GDP gap is a negative $200 billion. To achieve full-employment output (exactly), government should:

increase government expenditures by $40 billion.

Picture Refer to the diagram. If the full-employment GDP is Y3, government should:

increase taxes and reduce government spending.

When current tax revenues exceed current government expenditures and the economy is achieving full employment:

the cyclically adjusted budget has a surplus.

The cyclically adjusted budget tells us:

what the size of the federal budget deficit or surplus would be if the economy was at full employment.

In 2012, about ____ percent of the U.S. public debt was held by people and institutions abroad.

33

In 2012, about ____ percent of the U.S. public debt was held by the federal government and Federal Reserve.

40

An increase in the cyclical deficits will automatically increase the cyclically adjusted budget deficit.

False

(Last Word) Which of the following would not help to relieve the Social Security and Medicare shortfalls?

Restricting immigration of skilled working-age adults.

Picture Refer to the diagram. Which tax system has the least built-in stability?

T4.

The most likely way the public debt burdens future generations, if at all, is by:

reducing the current level of investment.