Econ Ch.11

Refer to the graph below. What combination would most likely cause a shift from AD1 to AD2?

A decrease in taxes and an increase in government spending

Refer to the graph below. The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation?

Decrease aggregate demand by increasing taxes

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 the goal of achieving price level stability?

Decrease government spending and increase taxes Equilibrium GDP = C+G+Ig+Xn = 500+100+50+20 = $670. Potential GDP = full-employment GDP = $620 which is lower than the equilibrium means the economy has an inflationary GDP gap. So, the suggest plan to address the inflationary GDP gap is to decrease government spending and increase taxes.

A contractionary fiscal policy can be illustrated by a(n):

Decrease in aggregate demand

The crowding-out effect of borrowing to finance public debt:

Decreases current spending for private investment

If Congress passes legislation to increase government spending to counter the effects of the pandemic related recession, then this would be an example of a(n):

Expansionary fiscal policy

A Federal budget deficit exists when:

Federal government spending exceeds tax revenues

The combination of fiscal policies that would reinforce each other and be most expansionary would be a(n):

Increase in government spending and a decrease in taxes

The set of fiscal policies that would be most expansionary would be a(n):

Increase in government spending and a decrease in taxes

Which combination of fiscal policy actions would most likely be offsetting?

Increase taxes and government spending

Which are contractionary fiscal policies?

Increased taxation and decreased government spending

The crowding-out effect suggests that:

Increases in government spending may raise the interest rate and thereby reduce investment

One important consequence of public debt in the United States is:

It transfers a portion of real output to foreign nations

An expansionary fiscal policy may be:

Partially offset by the crowding-out effect

In an aggregate demand and aggregate supply graph, an expansionary fiscal policy can be illustrated by a:

Rightward shift in the aggregate demand curve

A government economist states that: "The collection of personal income tax revenues automatically falls during a recession." This statement best describes how the progressive income tax system:

Serves as an automatic stabilizer for the economy

If the economy is to have automatic or built-in stabilizers, when real GDP rises:

Tax revenues should rise

Which group has a direct responsibility for providing analysis, advice and assistance to the U.S. President on economic matters?

The Council of Economic Advisors

The value of the marginal propensity to save is 0.2. If government increases taxes by 10 billion, the equilibrium GDP will:

decrease by $40 billion

When the Federal government takes an action to change taxes and spending to stimulate the economy such policy is:

discretionary

Discretionary fiscal policy is independent of Congress and based on the progressivity of the tax system.

false

A contractionary fiscal policy is shown as a:

leftward shift in the economy's aggregate demand curve.

When government spending is increased, the amount of the increase in aggregate demand primarily depends on:

size of the multiplier

A specific reduction in government spending will dampen demand-pull inflation by a greater amount the:

smaller is the eocnomy's MPS

If the government wishes to increase the level of real GDP, it might reduce:

taxes

Expansionary fiscal policy during a recession means cutting taxes, increasing government spending, or taking both actions.

true

The following is budget information for a hypothetical economy. All data are in billions of dollars. In which year is there a budget surplus?

year 2

Refer to the data question 18. In which year is there a balanced budget?

year 3

Refer to the data question 18. What year is the budget deficit $250 billion?

year 5

Refer to the data question 18. What is the public debt as a percentage of GDP in Year 5?

2.7 percent

In the graph below assume that year 1 has balanced budget and in year 2 government implemented discretionary fiscal policy of decreasing taxes. T1 represents tax plan for year 1 and T2 represents tax plan for year 2. The amount of cyclical deficit in year 2 is equal to:

200

In the graph below assume that year 1 has balanced budget and in year 2 government implemented discretionary fiscal policy of decreasing taxes. T1 represents tax plan for year 1 and T2 represents tax plan for year 2. The amount of actual deficit in year 2 is equal to:

300

Refer to the data question 18. What is the public debt in billions in year 5 considering the economy is only five years old.

300

The value of the marginal propensity to save is 0.2. If real GDP increases by $50 billion, this situation was the possible result of an increase in the government purchases of:

$10 billion

An economy is experiencing a high rate of inflation. The government wants to reduce GDP by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the government raise taxes to achieve its objective?

$12 billion With MPC =0.75, the multipler = 1 1 − M P C = 1 1 − 0.75 = 4. Change in GDP = Change taxes Multiplier × MPC× 36 = change in taxes × 4 × 0.75 So, change in taxes = $12