Macro Final; Chapter 16

The increase in the amount the government collects in taxes when the economy expands and the decrease in the amount the government collects in taxes when the economy goes into a recession is an example of

automatic stabilizers.

If the tax multiplier is minus−1.5 and a​ $200 billion tax increase is​ implemented, what is the change in​ GDP, holding all else​ constant? ​ (You may assume the price level stays​ constant.)

a​ $300 billion decrease in GDP

Fiscal policy refers to changes in

federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

The crowding out of government spending by private spending will be greater the

more sensitive​ consumption, investment, and net exports are to changes in interest rates.

An increase in government purchases of​ $200 billion will shift the aggregate demand curve to the right by

more than​ $200 billion.

Suppose real GDP is​ $13 trillion, potential real GDP is​ $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price​ level, Congress and the president would need to increase government purchases by

less than​ $500 billion.

Crowding out refers to a decline in​ ________ as a result of an increase in​ ________.

private​ expenditures; government purchases

During​ recessions, government expenditure automatically

rises because of programs such as unemployment insurance and Medicaid.

Expansionary fiscal policy will

shift the aggregate demand curve to the right.

An increase in the sensitivity of private spending​ (consumption, investment, and net​ exports) to changes in the interest rate​ ________ the government purchases multiplier.

will decrease

An economic expansion tends to cause the federal budget deficit to​ ________ because tax revenues​ ________ and government spending on transfer payments​ ________.

​decrease; rise; fall

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

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be​ ________ and real GDP to be​ _________.

​lower; lower

Fiscal policy is defined as changes in federal​ ________ and​ ________ to achieve macroeconomic objectives such as price​ stability, high rates of economic​ growth, and high employment.

​taxes; expenditures

Refer to the diagram to the right. An increase in taxes would be depicted as a movement from​ _______, using the static AD−AS model.

B to A

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real​ GDP?

an increase in government purchases

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.

An increase in government spending may expedite recovery from a recession in the short​ run, but in the long run this policy may

All of the above are correct.

Which of the following would be classified as fiscal​ policy?

The federal government cuts taxes to stimulate the economy.

​Historically, the largest U.S. federal budget deficits as a percentage of GDP in the 20th century occurred during

WWI and WWII.

To combat a recession with discretionary fiscal​ policy, Congress and the president should

decrease taxes to increase consumer disposable income.

The government purchases multiplier equals the change in​ ________ divided by the change in​ ________.

equilibrium real​ GDP; government purchases

The tax multiplier equals the change in​ ________ divided by the change in​ ________.

equilibrium real​ GDP; taxes

If the economy is falling below potential real​ GDP, which of the following would be an appropriate fiscal policy to bring the economy back to​ long-run aggregate​ supply? An increase in

government purchases.

Automatic stabilizers refer to

government spending and taxes that automatically increase or decrease along with the business cycle.

From the 1960s to​ 2014, transfer payments

have risen from 25 percent to about 48 percent of federal government expenditures.

Government deficits tend to increase during

periods of war and recession.

Which of the following is considered contractionary fiscal​ policy?

Congress increases the income tax rate

Which of the following would be considered a fiscal policy​ action?

A tax cut is designed to stimulate spending during a recession.

Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD−AS model in the diagram to the​ right, this would be depicted as a movement from

A to B.

Suppose the economy is in short run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long run equilibrium. Using the static AD−AS model in the diagram to the​ right, this would be depicted as a movement from

A to B.

Suppose the economy is in short run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run​ equilibrium, this would be depicted as a movement from​ ___ using the static AD−AS model in the diagram to the right.

C to B

Suppose the economy is in short run equilibrium above potential GDP and no policy is pursued. Using the static AD−AS model in the diagram to the​ right, this would be depicted as a movement from

C to D.

The government purchases multiplier is defined as

Change in equilibrium real GDP divided by Change in government purchases

If the federal​ government's expenditures are less than its tax​ revenues, then

a budget surplus results.

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

The federal government debt as a percentage of GDP fell

from 1998-2001

Crowding​ out, following an increase in government​ spending, results from​ (the exchange rate is the foreign exchange price of the domestic​ currency)

higher interest rates and a higher exchange rate.

During 1970−​1997, the U.S. federal government was

in deficit every year.

Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal​ policy? A significant

increase in inflation.

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes.

The largest source of federal government revenue in 2014 was

individual income taxes.

The three categories of federal government​ expenditures, in addition to government​ purchases, are

interest on the national​ debt, grants to state and local​ governments, and transfer payments.

The federal government debt equals

the total value of U.S. Treasury bonds outstanding.

The largest and fastestminus−growing category of federal government expenditures is

transfer payments.