Exam #4

In the short run, a negative AD shock will cause the inflation rate to:

. expectations; the money supply

An increase in the capital gains tax will most likely:

. decrease investment

The national debt held by the public is the amount of:

. federal debt held by individuals and organizations outside the federal government.

Foreign aid makes up approximately what percent of the U.S. federal government budget?

1

If tax rates are 10% on income up to $10,000, 20% for income between $10,001 and $20,000, and 30% for income over $20,000, the average tax rate for a person earning $25,000 is:

18%

The first signs of trouble in the subprime mortgage market came in August:

2007

U.S. real GDP growth turned negative in:

2008

The U.S. corporate tax rate is _____ and U.S. corporations on average pay _____ on their corporate income.

35%; less than 35%

The largest component of government spending is paying interest on the national debt.

False

Which statement, if true, will NOT limit the effectiveness of fiscal policy?

Increased government spending and tax cuts increase incomes and thus increase consumer spending further.

How did the housing boom of 1997-2006 increase aggregate demand?

It created more jobs and increased wages in the construction sector.

Which theory states that a tax cut does NOT affect aggregate demand, because people save all they gain from the tax cut?

Ricardian equivalence

What kind of monetary policy rule did Milton Friedman advocate?

The money supply should increase by 3 percent every year.

Which is NOT true regarding the 2009 stimulus plan enacted under President Obama?

The stimulus plan led to a high degree of crowding out of private investment.

The crowding out effect reduces the effectiveness of fiscal policy in combating economic shocks.

True

What is a reason for waste and inefficiency in government spending?

both weak incentives and lack of information on how to spend the money effectively

As a result of _____, a one-time-only tax rebate tends to create a small increase in spending over many years rather than a big increase in the present.

consumption smoothing

Which is NOT an automatic stabilizer?

defense spending

Spending on defense, law enforcement, and scientific research are all projected to increase as a percentage of GDP.

false

The corporate income tax is the single largest source of revenue for the federal government.

false

What kind of rising costs will mostly cause U.S. government spending to skyrocket in the future?

health care

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising:

inflation

If households use tax rebate checks to pay off their existing debt (such as credit cards and mortgages), this type of fiscal stimulus:

is likely to have a negligible impact on aggregate demand.

As a result of the multiplier effect, a tax cut causes a:

larger shift of the aggregate demand curve to the right

Fiscal policy is:

less effective in dealing with real shocks than with aggregate demand shocks.

Currently, marginal tax rates are:

lower than in the past

If the Federal Reserve reduces the growth rate of the money supply to combat a negative real shock, the inflation rate will be:

lower, but the growth rate will be even lower.`

The annual difference between federal spending and revenues is called the:

national deficit

Given the possibilities for crowding out, expansionary fiscal policy financed through government borrowing is MOST likely to be effective when the:

private sector is reluctant to spend or invest.

Disinflation occurs when the Fed:

reduces the growth rate of the money supply.

A negative real shock causes the LRAS curve to:

shift left

The fiscal stimulus undertaken by Argentina from 1999-2002 was counterproductive.

stimulus

Regarding fiscal stimulus, Republicans tend to favor _____; Democrats tend to favor _____.

tax cuts; increased government spending

Fiscal policy can offset a positive shock to aggregate demand by raising:

taxes

In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, output growth will increase because of:

the increase in money growth only.

Bringing inflation down is more difficult than raising it because wages and prices are sticky downward.

true

Monetary policy is much less effective at combating a real shock than a demand shock.

true

If the opportunity cost of resources used for government programs is ignored, then the government budget _____ the role of government in the economy.

underestimates

If a country's central bank becomes more credible and announces a monetary contraction in advance, then:

unemployment costs will be lower.