ECON CH13 lecture notes

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. At E3, the economy:

has an inflationary gap.

If overall spending declines and thus the economy contracts, the government could counter this by:

increasing government spending.

Expansionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.

right; recessionary

When the unemployment rate decreases, the budget:

surplus gets larger or the deficit gets smaller

Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, its purchases of goods and services and its transfers are $2 trillion, and tax revenues are $1.5 trillion. At the end of the fiscal year, the debt is:

$7.5 trillion

(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E2. If there is an increase in taxes_____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD2; left; decrease; decrease

(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E2. If there is an increase in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP

AD2; right; increase; increase

Suppose the economy is operating at an output level of $5,400 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this inflationary gap.

Decreasing government purchases of goods and services by $100 billion

Suppose the government increases spending more than is necessary to close a recessionary gap. What is the most likely result?

Inflation will increase.

Which of the following is NOT an example of government transfers?

a reimbursement of personal income tax withheld from wages

If _____, expansionary fiscal policy is most likely to crowd out private spending.

aggregate income is $500 billion above its potential level

(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. If the economy is at equilibrium at E1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____

contractionary; left

(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y1 and P1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

contractionary; left

If the marginal propensity to consume is 0.75 and taxes increase by $30 billion, real GDP will:

decrease by less than $120 billion.

Suppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

decrease; expansionary; increase

An increase in government spending of $300 billion and a tax cut of $300 billion will have _____ effects on the budget balance and _____ effects on real GDP.

equal; unequal

Automatic stabilizers are government spending and taxation changes that cause fiscal policy to be _____ when the economy contracts.

expansionary

(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____ .

expansionary; right

Suppose that marginal propensity to consume is equal to 0.9 and the government increases its spending by $200 billion. This increase in spending is financed by a $200 billion increase in taxes. As a result of this, GDP will:

increase by $200 billion.

If the government spends an extra $5 billion on goods and services, GDP will:

increase by more than $5 billion.

If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.

increase government purchases; AD; right

If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should _____ government purchases of goods and services by _____ .

increase; $25 billion

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $700 billion, _____ government spending by _____ would bring the economy to potential output.

increasing; $20 billion

The stability pact signed in 1999 by the European nations that adopted the euro required each country to:

keep its actual budget deficit below 3% of its GDP

If the marginal propensity to consume is 0.1, then the tax multiplier is:

less than 10

If the marginal propensity to consume is 0.9, then the tax multiplier will be:

less than 10.

Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. (Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose the government decides to tax its citizens. The tax multiplier is:

less than the government spending multiplier.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD:

no change in discretionary fiscal policy is warranted.

(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be appropriate to use contractionary fiscal policy to shift aggregate demand in _____ from _____.

panel (b); AD1 to AD2