ECON CHAPTER 16
Suppose the economy is in short run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the basic ADminus−AS model in the diagram, this would be depicted as a movement from
A to E.
Refer to the diagram. An increase in taxes would be depicted as a movement from _______, using the basic ADminus−AS model.
B to A
Which of the following is considered contractionary fiscal policy?
Congress increases the income tax rate
Which of the following is a reason why we should consider the federal national debt a problem?
If the debt drives up interest rates, crowding out will occur.
________ and ________ are the largest sources of revenue collected by the federal government.
Individual income taxes; social insurance taxes
If the federal government's expenditures are less than its tax revenues, then
a budget surplus results.
In the long run, most economists agree that a permanent increase in government spending leads to
a decrease in private spending by the same amount that government spending increased.
Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the price level is not held constant?
a decrease of less than $80 billion
Fiscal policy actions that are intended to have longminus−run effects on real GDP attempt to increase ________ through changing ________.
aggregate supply; taxes
If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy?
an increase in taxes
The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of
automatic stabilizers.
The aggregate demand curve will shift to the left ________ the initial decrease in government purchases.
by more than
Expansionary fiscal policy
can be effective in the short run.
From an initial long-run equilibrium, if aggregate demand grows more slowly than long-run and short-run aggregate supply, then Congress and the president would most likely
decrease taxes.
The tax multiplier equals the change in ________ divided by the change in ________.
equilibrium real GDP; taxes
In the dynamic model of ADminus−AS in the figure to the right, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely pursue
expansionary fiscal policy.
Congress and the president carry out fiscal policy through changes in
government purchases and taxes.
Which of the following is an objective of fiscal policy?
high rates of economic growth
The multiplier effect refers to the series of
induced increases in consumption spending that result from an initial increase in autonomous expenditures.
If government purchases increase by $100 billion and lead to an ultimate increase in aggregate demand as shown in the graph to the right, the difference in real GDP between point A and point B will be
more than $100 billion.
Consider the hypothetical information in the table for potential real GDP, real GDP, and the price level in 2018 and in 2019 if Congress and the president do not use fiscal policy. If Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2019, which of the following will be lower than if Congress and the president had taken no action?
real GDP and the inflation rate
Which of the following is an example of discretionary fiscal policy?
the tax cuts passed by Congress in 2001 to combat the recession
In the dynamic model of ADminus−AS in the diagram to the right, if the economy is at point A in year 1 and is expected to go to point B in year 2, and no fiscal or monetary policy is pursued, then at point B
the unemployment rate is very low.
Which of the following is the largest category of federal government expenditures?
transfer payments
Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
higher; higher
A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments _________.
increase; fall; rise
A reduction in the corporate tax rate to 20 percent would ________ the return corporations receive from new investments in equipment and factories, and this would ________ aggregate supply.
increase; increase
It is ________ difficult to effectively time fiscal policy than monetary policy because ________.
more; fiscal policy takes longer to implement
