econ ch17

social insurance:

programs are government programs intended to protect families against economic hardship

multiplier

the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change

fiscal policy:

the use of taxes, government transfers, or government purchases of goods and services to stabilize the economy (or to shift the aggregate demand curve)

cyclically adjusted budget balance

used in order to separate the effects of the business cycle; an estimate of the budget balance if the economy were at potential output

why can public debt be a problem?

- public debt may crowd investment spending, which reduces long-run economic growth - rising debt may lead to government default, resulting in economic and financial tumoil

What is the equation for multiplier?

1/(1-MCP) - 1 divided by the marginal propensity to save

if the government's revenues are greater than its expenditures, then it has a budget: a. deficit b. surplus c. balance d. equality

b. surplus

What affects increase aggregate demand?

An increase in government purchases of goods and services, a cut in taxes, and an increase in government transfers

Medicaid, Medicare, and Social Security are examples of: a. unilateral payments b. transfer payments c. monetary policy d. taxes

b. transfer payments

What is the budget balance measures of fiscal policy?

S government = T - G - TR

Austerity

Sharp cuts in spending plus tax increases

fiscal years

U.S. government budget accounting is calculated on this basis

Budget deficit:

a negative budget balance

Budget surplus:

a positive budget balance

What affects decrease in fiscal policy?

a reduction in government purchases of goods and services, an increase in taxes, and a reduction in government transfer

contractionary fiscal policy leads to...

a reduction in real GDP

debt GDP ratio

a widely used measure of fiscal health - this number can remain stable or fall even in the face of moderate budget deficits if GDP rises over time

in the basic equation of nation income accounting, GDP = C + I + G + X - IM, the government directly controls ________ and influences __________ through fiscal policy. a. G; C and I b. T; G and C c. C; X and M d. I; G and T

a. G; C and I

government transfer payments rise when the economy is contracting and fall when the economy is expanding. In this role, transfer payments are described as: a. automatic stabilizers b. discretionary fiscal policy c. balanced budget policy d. deficit reduction policy

a. automatic stabilizers

when the economy is in a recession, tax receipts _______ and unemployment insurance payments _______ a. decrease; increase b. increase; increase c. increase; decrease d. decrease; decrease

a. decrease; increase

the federal budget tends to move towards __________ as the economy ________. a. deficit; contracts b. deficit; expands c. surplus; contracts d. a balanced budget; contracts

a. deficit; contracts

if the average retirement age decreases: a. implicit liabilities will increase b. implicit liabilities will decrease c. implicit liabilities will be unaffected d. the public debt will immediately increase

a. implicit liabilities will increase

social security spending is projected to: a. increase as baby boomers retire b. decrease as baby boomers retire c. stay the same over the next decade d. increase for this decade and then decline

a. increase as baby boomers retire

a government surplus is contractionary because _______ are contractionary a. increase in taxation b. increases in government purchases c. increases in government transfers d. decreases in taxation

a. increase in taxation

to close an inflationary gap with fiscal policy, the government could: a. reduce budget allocations to interstate highway maintenance b. increase federal subsidies to state universities c. lower the corporate income tax rate d. raise the average amount awarded for a disability pension

a. reduce budget allocations to interstate highway maintenance

an example of an automatic stabilizer is: a. tax receipts rising when GDP rises b. a discretionary increase in taxes c. government purchases of goods and services rising when GDP rises d. government transfers rising when GDP rises

a. tax receipts rising when GDP rises

all of the following are sources of federal tax revenue EXCPET: a. the personal income tax b. sales taxes c. social insurance taxes d. the corporate profits tax

b. sales taxes

government's efforts to stabilize the business cycle through fiscal policy can destabilize the economy because of: a. the time necessary to draw up a budget appropriate to the circumstances b. a negative interaction between fiscal and monetary policy due to the multiplier effect c. a tendency of prices to change faster than the interest rate d. business cycles that are closely synchronized to the political cycle

a. the time necessary to draw up a budget appropriate to the circumstances

medicaid, food stamps, and sales taxes are all automatic stabilizers a. true b. false

a. true

one of the lags associated with fiscal policy is the time it takes to recognize that the economy has developed a recessionary or inflationary gap a. true b. false

a. true

taxes increase as GDP rises. This is an example of an automatic stabilizer a. true b. false

a. true

the multiplier effect of an increase in transfer payments is smaller than that of an equal increase in government purchases of goods and services because some of the transfer payments is likely to be saved a. true b. false

a. true

the size of the multiplier increases as the size of the marginal propensity to consume increases a. true b. false

a. true

what happens with active fiscal policy?

active fiscal policy may make the economy less stable due to time lags in policy formulation and implementation

expansionary fiscal policy leads to...

an increase in real GDP

autonomous change in aggregate spending:

an initial change in the desired level of spending by firms, households, or government at a given level of real GDP

discretionary fiscal policy

arises from deliberate actions by policy makers rather than from the business cycle

a contractionary fiscal policy either _________ government spending or _______ taxes a. increases; increases b. decreases; increases c. increases; decreases d. decreases; decreases

b. decreases; increases

the effect of a government deficit is: a. contractionary b. expansionary c. neutral d. biased

b. expansionary

the decision to build more aircraft carriers to keep employment high is an example of: a. prudent defense spending b. expansionary fiscal policy c. neutral fiscal policy d. being prepared to defend our country

b. expansionary fiscal policy

a change in government transfers shifts the aggregate demand curve by more than a change in government spending for goods and services and has a larger effect on real GDP. a. true b. false

b. false

medicare covers much of the cost of medical care for Americans with low incomes a. true b. false

b. false

the budget deficit usually decreases when the unemployment rate increases a. true b. false

b. false

when faced with a recessionary gap, the government can increase taxes and cut spending to close it a. true b. false

b. false

the national debt: a. is the sum of all past federal surpluses b. grows when the government runs a deficit c. grows when the government runs a surplus d. did not exist until 1998

b. grows when the government runs a deficit

budget deficits almost always: a. decrease with inflation and increase with deflation b. increase when unemployment increases and fall when unemployment falls c. decrease when unemployment increases and increases when unemployment falls d. increase when the aggregate price level increases and fall when the aggregate price level falls

b. increase when unemployment increases and fall when unemployment falls

contractionary fiscal policy includes: a. decreasing taxes b. increasing taxes c. increasing the money supply d. increasing government expenditures

b. increasing taxes

if the economy is at equilibrium above potential output, there is a(n) __________ gap, and __________ fiscal policy is appropriate: a. recessionary; expansionary b. inflationary; contractionary c. recessionary; contractionary d. inflationary; expansionary

b. inflationary; contractionary

the largest source of federal tax revenues is: a. property taxes b. personal income taxes c. corporate income taxes d. sales taxes

b. personal income taxes

discretionary fiscal policy entails: a. changing the money supply to influence interest rates and investment spending b. using government spending or tax policy to affect aggregate demand c. lifting trade barriers on imports d. setting policy to raise the natural rate of unemployment

b. using government spending or tax policy to affect aggregate demand

which of the following is a government transfer? a. wages paid to U.S. senators b. purchases of tanks for the army c. Social Security payments to retired auto workers d. payments to contractors for repairs on interstate highways

c. Social Security payments to retired auto workers

changes in taxes and government transfers shift the aggregate demand curve _______ government purchases. a. by more than b. by exactly as much as c. by less than d. in inverse proportion to

c. by less than

some argue that budget deficits will lead to reduced private spending because: a. the government will purchase so many goods and services that it will lead to a shortage of consumer goods and services b. budget deficits will reduce interest rates on savings and decrease consumers' wealth c. consumers, anticipating higher taxes, will reduce consumption to save money to pay the future taxes d. the government will have to increase transfer payments to finance the deficit

c. consumers, anticipating higher taxes, will reduce consumption to save money to pay the future taxes

fiscal policy that decreases aggregate demand is: a. balanced b. supplemental c. contractionary d. expansionary

c. contractionary

if the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to_____, which will shift the AD to the _______. a. decrease government purchases; right b. increase government purchases; left c. decrease government purchases; left d. raise tax rates; right

c. decrease government purchases; left

spending promises made by the government that are effectively a debt, although they are not included in the usual debt statistics, are known as: a. burden of debt b. structural deficit c. implicit liabilities d. constructive debt

c. implicit liabilities

expansionary fiscal policy: a. increases long-run aggregate supply b. decreases long-run aggregate supply c. increases aggregate demand d. decreases aggregate demand

c. increases aggregate demand

the government has a budget surplus if ____________ expenditures a. its revenues are equal to b. its revenues are less than c. its revenues are greater than d. the money supply is less than

c. its revenues are greater than

when the government borrows funds to pay for budget deficits: a. planned aggregate spending decreases rather than increases b. the multiplier effect of government purchases increases c. private investment spending may be crowded out d. the interest rate and savings decrease

c. private investment spending may be crowded out

when the government borrows funds to pay for budget deficits: a. planned aggregate spending decreases rather than increases b. the multiplier effect of government purchases increases c. private investment spending may be crowed out d. the interest rate and savings decrease

c. private investment spending may be crowed out

the fact that tax receipts fall during a recession: a. makes the multiplier stronger b. has no impact on the multiplier c. reduces the adverse effect of the initial fall in aggregate demand d. acts as an automatic contractionary fiscal policy

c. reduces the adverse effect of the initial fall in aggregate demand

when the unemployment rate decreases, the budget: a. will always be balanced b. surplus gets smaller or the deficit gets larger c. surplus gets larger or the deficit gets smaller d. is unaffected

c. surplus gets larger or the deficit gets smaller

what affects AD indirectly?

changes in government taxes and government transfers

Which of the following is NOT an example of government transfers? a. Medicaid-paid prescription drugs for low-income individuals b. unemployment insurance c. a Social Security disability pension d. a reimbursement of personal income tax withheld from wages

d. a reimbursement of personal income tax withheld from wages

an inflationary gap occurs when: a. prices are too low b. real output is too low c. potential exceeds actual output d. actual output exceeds potential output

d. actual output exceeds potential output

what can the federal government do to finance a deficit? a. cut taxes b. increase purchases of goods and services c. increase transfer payments d. borrow funds

d. borrow funds

if the marginal propensity to consume is 0.75 and government purchases of goods and services decrease by $30 billion, real GDP will: a. increase by $30 billion b. increase by $22.5 billion c. decrease by $30 billion d. decrease by $120 billion

d. decrease by $120 billion

suppose the government increases spending to fund tuition assistance for qualifies college students. Automatic stabilizers will _______ the _________ effect of the __________ in aggregate demand. a. increase; contractionary; decrease b. decrease; contractionary; increase c. increase; expansionary; increase d. decrease; expansionary; increase

d. decrease; expansionary; increase

fiscal policy that increases aggregate demand is: a. balanced b. supplemental c. contractionary d. expansionary

d. expansionary

a recessionary gap can be closed with: a. contractionary monetary policy b. an increase in taxes c. a decrease in government purchases d. expansionary fiscal policy

d. expansionary fiscal policy

if the actual output lies below potential output, then an appropriate fiscal policy would be to______, which will shift the _______ curve to the _______. a. increase government purchases; AD; left b. increase transfer payments; AS; right c. increase tax rates; AD; right d. increase government purchases; AD; right

d. increase government purchases; AD; right

expansionary fiscal policy includes a. increasing taxes b. increasing the money supply c. decreasing government expenditures d. increasing government expenditures

d. increasing government expenditures

when the economy expands, income tax receipts will: a. rise, but sales tax revenues will remain the same b. fall, but sales tax revenues will rise c. stay the same unless government changes the tax rates d. rise, and sales tax revenues will rise

d. rise, and sales tax revenues will rise

The national debt _____ when the federal government incurs a _____ a. falls; deficit b. rises; surplus c. stays the same; surplus d. rises; deficit

d. rises; deficit

Marginal propensity to consume (MPC)

determines the size of the multiplier

expansionary fiscal policy:

fiscal policy that increases AD

discretionary fiscal policy :

fiscal policy that is the result of deliberate actions by policy makers rather than rules

contractionary fiscal policy:

fiscal policy that reduces AD

public debt:

government debt held by individuals and institutions outside the government

what affects AD directly?

government purchases of goods and services

contractionary fiscal policy shifts the AD curve...

leftward

public debt

persistent budget deficits have long-run consequences because they lead to this

automatic stabilizers

reducing the size of the multiplier and automatically reducing the size of fluctuations in the business cycle - government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expandds

expansionary fiscal policy shifts the AD curve...

rightward

fiscal year:

runs from October 1 to September 30 and is labeled according to the calendar year in which it ends

largest implicit liabilities come from...

social security

implicit liabilities:

spending promises made by governments that are effectively a debt despite that fact that they are not included in the usual debt statistics

lump sum taxes

taxes reduce the size of the multiplier

lump-sum taxes:

taxes that don't depend on the taxpayer's income

Ricardian equivilence

that consumers will cut back spending today to offset expected future tax increases

fluctuations in the budget balance are due to

the effects of the business cycle

debt-GDP ratio:

the government's debt as a percentage of GDP

Marginal Propensity to Consume (MPC):

the increase in consumer spending when disposable income rises by $1