Macro-Chapter 13-SmartBook

note.

A U.S. Treasury security that matures in 2-, 3-, 5-, 7-, and 10-year increments is known as a Treasury

Treasury bill.

A U.S. Treasury security that matures in less than a year is called

inflation.

A big risk to the otherwise safe Treasury securities is

inflation

A big risk to the otherwise safe Treasury securities is the effect of .

government spends more than it brings in tax revenue.

A budget deficit exists when,

government spends less than it brings in tax revenue.

A budget surplus exists when,

implementation

A(n) ____________ lag refers to the time fiscal policy takes to have a measurable effect on the economy.

AD falls, wages fall, SRAS increases, and the economy self-corrects at lower prices in the long run.

According to the AD/AS model, what would have happened after the collapse of the U.S. housing market?

People spend rather save People expect tax cuts to be permanent

After taxes, but not spending, are cut, Ricardian equivalence fails to hold when which of the following situations occur? Select all that apply.

People do not change their behavior People save rather than spend

After taxes, but not spending, are cut, Ricardian equivalence holds when which of the following situations occur? Select all that apply.

Actual GDP was less than potential GDP.

After the collapse of the U.S. housing market, what happened to actual GDP compared to potential GDP?

Expansionary fiscal policy designed to increase aggregate demand.

Assume that the government in some nation intended to respond to low employment via fiscal policy.What type of policy would this require?

This could happen if the formulation lag and the implementation lag exceeded the recession.

Assume that this policy ended up having an undesirable outcome. How could this happen in terms of formulation and implementation lags?

AD does not change

Assume that, during a recession, the federal government reduces taxes but Ricardian equivalence holds. What is the effect on aggregate demand (AD)?

they don't require specific policy action.

Automatic stabilizers face less severe consequences of time lags because

spending cuts and income tax increases.

Contractionary fiscal policy could involve a combination of government:

In an expansion, incomes rise. This increases taxes and tax rates on households.

During an expansion, how do automatic stabilizers resemble contractionary fiscal policy?

increase.

During recessions, budget deficits tend to

automatic stabilizers.

Even in the absence of fiscal policy legislation, the economy still experiences some level of fiscal-policy effect due to

Increase government spending and decrease in taxation

Expansionary fiscal policy involves

aggregate demand.

Fiscal policy affects the economy through changes in

the current state of the economy is unclear.

Fiscal policy is subject to an information lag when

Investment spending, Household consumption, government spending

Fiscal policy that involves changes in government spending affects which of the following components of aggregate demand?

as a percentage of GDP.

Generally, budget deficits are expressed

taxes; purchases and transfer payments

Government gains revenue through __________ and expends money through ___________.

fiscal policy

Government spending and taxation policies are examples of policy.

are not included in GDP.

Government transfer payments

contractionary fiscal policy, which includes a reduction in government spending by less than $500 million.

If the government wants to reduce GDP by $500 million, the most appropriate action is:

increase

If you are a member of Congress who is concerned about too much price inflation in the economy, you might sponsor a bill to _______ Correct income tax rates.

rational.

If, after tax cuts, people save rather than spend and Ricardian equivalence holds. This group of people is considered

In a recession, incomes fall. This reduces taxes and tax rates on households.

In a recession, how do automatic stabilizers resemble expansionary fiscal policy?

Increased reliance on social welfare programs increases government spending.

In a recession, how does government spending work as an automatic stabilizer?

Decreased reliance on social welfare programs decreases government spending.

In an expansion, how does government spending work as an automatic stabilizer?

Increased government spending Decreased taxes

In response to the collapse of the U.S. housing market, the federal government can pursue a "Keynesian" policy. What does this mean? Select all that apply.

automatic stabilizers.

In the U.S., the income tax system is progressive. That is, the more we earn, the higher tax rate we face. As a result, taxes serve as

tax increases government spending cuts

In the face of a recession, tax cuts today are often countered by __________ in the future. (Select all that apply).

lowering taxes.

In the presence of recession, discretionary fiscal policy can increase spending by

Policy-makers often lack all the information they need

Indicate a reason why fiscal policy is not always a sure-fire method to stabilize the economy.

Flexibility in emergencies

Indicate one benefit of public debt?

it allows us to compare the amount to our ability to pay it back.

It helpful to consider public debt as a percentage of GDP rather than as a simple numeric amount because

surplus at least as large as the deficit.

It is possible for a nation's government to run a budget deficit in some years but not have national debt if the economy initially had a(an):

expansionary fiscal policy.

Keynesian economic policy most closely resembles

transfer payments.

Payments from government to households for which no good or service is exchanged are called

it is a safe investment relative to other investment vehicles.

People hold government debt (i.e. Treasury securities) because

a. Saabira's disposable income is $ 57,800 (68,000- 68,000*15%), and the amount of tax she pays to the government is $ 10,200 (68,000-57,800). b. her disposable income will now be $ 52,800 ( 60,000- 60,000*12%), and the amount she will pay in taxes is $ 7,200 (60,000*12%). c. $8000( Fall in salary =68000-60000=8000) & $ 5000( fall in disposable income =57800-52800 =5000) d. Income taxes are automatic stabilizers. As there is lesser tax for people with less income and vice versa.

Saabira earns $68,000 a year and pays an average annual tax rate of 15%.

Formulation lags Information lags Implementation lags

Suppose the federal government pursues an expansionary fiscal policy. By the time the fiscal policy's effects actually reach the economy, it has already corrected itself. What might have caused this? Select all that apply.

Ricardian equivalence

Suppose the government cuts taxes in response to recessionary pressure in an attempt to stimulate spending. However, people don't change their spending patterns. What theory explains this?

Increases in public spending can increase consumption through a multiplier effect.

Suppose the government increases public spending in order to stimulate the economy. Why might this increase aggregate demand?

during a recession.

Tax cuts today (which are often countered by future tax increases and government spending cuts) occur

expansionary fiscal policy.

Taxation and spending policies designed to increase aggregate demand are called

contractionary fiscal policy.

Taxation decisions designed to decrease aggregate demand are called

automatic stabilizers.

Taxes and government spending that affect fiscal policy independent of policy-makers' actions are called

fiscal

The U.S. President and Congress conduct policy.

Treasury securities.

The U.S. government borrows money from people by selling

deficit

The amount by which tax revenues fall short of spending each year is called a ___________.

future generations.

The burden of government debt falls largely on

future

The burden of government debt falls largely on (Enter one word) generations.

public

The cumulative sum of all deficits and surpluses is called _______ debt.

time lags.

The effect of changing tax rates to conduct discretionary fiscal policy is limited by

Slow economic growth Crowding out A distorted credit market

The indirect costs of government debt involve which of the following?

The long-run change in prices takes too long

The predictions made by the AD/AS model differ from the actual events that occurred after the collapse of the U.S. housing market. Why didn't lawmakers allow the economy to self-correct?

is either short-or long-term.

The repayment period on U.S. government Treasury securities

relatively low, but considered very safe.

The return on a Treasury bill is

an information lag.

The time it requires to assemble accurate information about GDP and other economic indicators leads to

formulation

The time required to pass legislation necessary to stabilize the economy can lead to a(n) ______ lag

public debt.

The total amount of money that a government owes at a point in time is called

The economy might self-correct during the lag Implementation may come too late to be effective

There is a gap between fiscal policy decisions and the actual effect of those policies in the economy. Why is this important? Select all that apply.

mature in less than a year.

Treasury bills, also known as T-bills,

Treasury notes are more liquid than Treasury bonds.

Treasury notes pay less interest than Treasury bonds because

low risk, low return.

U.S. government Treasury securities attract investors who seek

AD decreases

What happens to the AD curve after an event such as the collapse of the U.S. housing market?

Contractionary fiscal policy

What is the appropriate policy response by government to an economy that lawmakers fear is growing too fast?

Interest rate paid

What is the direct cost of government debt?

Actual GDP is less than potential GDP

What is the effect of a contractionary fiscal policy that reaches the economy so late that the economy has already self-corrected?

Actual GDP exceeds potential GDP

What is the effect of an expansionary fiscal policy that reaches the economy so late that the economy has already self-corrected?

Debt is the sum of all deficits and surpluses.

What is the relationship between the deficit and public debt?

The economy recovers slower than with no policy at all

What prediction can you make about the economy if expansionary fiscal policy is insufficient to return the economy to its pre-recession level?

Consumers felt poorer

What was the most immediate and recognizable effect of the burst of the housing bubble?

surplus

When government revenue exceeds government spending, a budget _________ exists.

budget deficit

When government revenue is less than government spending, a _________ exists.

Time lags

When lawmakers disagree on the type of stabilization policy the economy requires, what is the result?

(C + I + G + NX) increases.

When the federal government implements a policy designed to stimulate the economy,

Unemployment benefits Social Security payments Disability payments

Which of the following are considered government transfer payments?

Government decisions about public spending Government decisions about taxation

Which of the following defines fiscal policy?

As people earn more, they pay more in taxes. This slows spending.

Which of the following describes an automatic stabilizer?

Debt allows the U.S. to maintain a system of subsidized student-loan programs. The ability to pay for investments that lead to economic growth.

Which of the following is a benefit of government debt?

People pay a different proportion of their income as taxes.

Which of the following is true of the income tax laws in the United States?

Congress; The U.S. President

Which of the following policy-making bodies is/are responsible for U.S. fiscal policy?

It allows us to compare the amount to our ability to pay it back

Why is it helpful to consider public debt as a percentage of GDP rather than as a simple numeric amount?

Price level increases too quickly

Why might the government intervene when the economy is "booming?"

Deficits increase as spending rises and revenues fall.

during a recession, government often pursues expansionary fiscal policy. how does this affect budget balances