Macro-Econ Test 2 Ch 10

Increased government _________ leads to a larger increase in GDP when compared to the same reduction in ________.

spending; taxes

Changes in taxes first cause changes in __________________, and thus the government tax multiplier is ______________ than the government spending multiplier.

disposable income; smaller

What type of government spending would be most effective in mitigating the crowding-out effect?

education subsidies

Suppose the economy is in a recession. To increase demand using discretionary fiscal policy, the government can

increase government spending or cut taxes

Suppose the Treasury sells $10 billion worth of securities to the Social Security Administration and $15 billion to the general public. This sale added ________ billion to gross public debt and ________ billion to the debt held by the public.

$25; $15

Supply-side fiscal policies include all of the following EXCEPT:

increasing transfer payments.

Figure: Laffer Curve 2 (Figure: Laffer Curve 2) The figure shows the Laffer curve for an economy whose tax rate is 80%. Supply-side economists would argue that the government should:

reduce the tax rate to 40%.

Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is:

supply-side fiscal policy.

__________ are all examples of mandatory spending.

Social security, interest on the national debt, and Medicare

If a government collects $1,400 in tax revenue and spends $1,600, it has:

a deficit of $200.

The progressive income tax and transfer payments are the two main:

automatic stabilizers.

Suppose that at the end of 2014, the government holds debt of $150 billion, has collected tax revenue of $50 billion, and has spent $75 billion. The national debt at the beginning of 2015 is:

$175 billion.

________ policy involves adjusting government spending and tax policies to move the economy toward full employment, economic growth, and low inflation.

Discretionary fiscal

Suppose the U.S. government decides to pay off all of its debt. Which of the following would NOT be a consequence of that action?

Income would be redistributed to the poor, because lower-income individuals tend to own more government bonds than the average taxpayer.

The largest source of federal government revenues is:

Individual income taxes

The _____ shows that when incentives to work and produce are hampered by a high federal marginal income tax, reducing the marginal tax might actually increase the total tax revenue.

Laffer curve

Which of the following program(s) is (are) most likely to have a large generational imbalance?

Medicare

__________ government spending, _____ transfer payments, and ____ taxes are all examples of contractionary fiscal policy.

Reducing; increasing; raising

_____ is the amount by which annual tax revenues exceed government expenditures.

The budget surplus

When workers lose their job, they file for unemployment benefits, so government spending on such programs naturally rises during recessions. As the economy recovers and people go back to work, spending on unemployment programs shrinks. Which of the following is CORRECT?

Unemployment compensation is a form of automatic stabilizer.

Suppose the economy is growing at 4% a year, inflation is measured at 0.5% a year, and the federal deficit is relatively high. An economist who suggests that we do nothing is advocating:

a functional finance approach to federal budgeting.

The proposition that federal expenditures and taxes would have to be equal to each other every year is called the ________ approach.

annually balanced budget

In recent years, countries such as China have been _____ U.S. debt as a way to keep their currencies from _____ against the U.S. dollar.

buying; rising

Both Social Security and Medicare are pay-as-you-go programs. This means that:

current taxpayers fund the benefits that are currently paid out.

Public debt held by foreigners is known as ________ debt.

externally held

Contractionary fiscal policy is typically used to:

fight inflation stemming from an overheated economy.

The _____ lag is the time required to turn fiscal policy into law and affect the economy.

implementation

If the economy expands beyond the level of full employment, what is the outcome?

inflation

Using demand-side fiscal policy to stimulate aggregate demand when the economy is at full employment will primarily result in:

inflation

Public debt owned by U.S. banks, corporations, mutual funds, pension plans, and individuals is called ________ debt.

internally held

The cyclically balanced budget:

is not easy to implement, because it is difficult to plan to balance the surpluses and deficits over a span of years.

Rising productivity will drive increased economic growth and raise the average standard of living, shifting _____ curve to the _____.

long-run aggregate supply; right

Transfer payments are:

monies paid directly to individual by the government

When the economy is in a recession, welfare and unemployment compensation payments _______ and tax revenues ____________.

rise; decline

If interest rates rise, the burden of a nation's public debt _____ and the probability of a default _____.

rises; rises

The government can finance a budget deficit by:

selling assets.

Figure: Understanding SRAS and LRAS Shifts (Figure: Understanding SRAS and LRAS Shifts) This graph shows:

supply-side fiscal policies.

If the government borrows money from the Federal Reserve:

the quantity of money in circulation will rise.

Which of the following is NOT an explicit short-run goal of discretionary fiscal policy?

zero unemployment

What approach to federal finance would you agree with if you wanted the federal government to restrict spending or raise taxes during booms and use surpluses from the booms to offset deficits during recessions?

cyclically balanced budget

Using discretionary fiscal policy to smooth the short-term business cycle is challenging because:

deciding on fiscal policy often takes a long and contentious legislative process.

If an economy is producing at a level beyond full employment, using contractionary fiscal policy to reduce aggregate demand means a tradeoff between ________ price levels and ________ output.

lower;lower

John, a U.S. taxpayer, buys $5,000 in U.S. savings bonds. When he collects interest on the bonds, who ultimately pays the interest?

other taxpayers like John.

Suppose the government increases aggregate demand to a level that increases GDP above its long-run equilibrium level. What sequence of events would follow?

prices rise; GDP increases; workers demand higher wages; short -run aggregate supply shifts to the left; GDP drops

A problem with supply-side fiscal policies is that they:

take longer to work than demand-side fiscal policies.

(Figure: Effects of Policy Shifts) If government spending increases, shifting aggregate demand from _____ to _____, aggregate output will increase from _____ to _____.

AD0; AD1; Q0; Qf

One argument against using taxation to pay off the public debt is that it will redistribute wealth from:

poorer people who do not own bonds to richer bondholders.

The Federal Reserve can purchase ____ to fund fiscal policy, resulting in _____.

bonds; an increase in the money supply

Suppose a government finances its expansionary fiscal policy by borrowing from the public. Joseph is concerned that this will increase the demand for loanable funds, drive up interest rates, and leave less loanable money available for consumers and businesses. Joseph is concerned about the:

crowding-out effect.

When the economy is overheating and policymakers pursue contractionary fiscal policy, they express willingness to trade off _________ output for a ________ price level.

lower; lower