Macroeconomics Chapter 13

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by

decreasing taxes by $25 billion.

Discretionary fiscal policy will likely cause budget

deficits during recessions and surpluses during periods of demand-pull inflation.

Fiscal policy refers to

deliberate changes in government spending and taxes to promote economic growth, full employment, and price level stability.

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should

increase government expenditures by $50 billion.

If the MPS in an economy is 0.4, the government could shift the aggregate demand curve leftward by $50 billion by

reducing government expenditures by $20 billion.

Answer the question based on the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. The operational lag of fiscal policy is reflected in event(s)

5

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

Reductions in federal tax rates on personal and corporate income.

An appropriate fiscal policy for a severe recession is

a decrease in tax rates.

Which of the following is not considered a legitimate concern of a large public debt?

bankruptcy of the federal government

The U.S. public debt

consists of the historical accumulation of all past federal deficits and surpluses.

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should

increase tax rates and/or reduce government spending.

Discretionary fiscal policy refers to

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Discretionary fiscal policy is so named because it

involves specific changes in taxes and government spending undertaken expressly for stabilization at the option of Congress.

Contractionary fiscal policy is so named because it

is aimed at reducing aggregate demand and thus achieving price stability.

Expansionary fiscal policy is so named because it

is designed to expand real GDP

A tax reduction of a specific amount will be more expansionary the

larger is the economy's MPC.

Built-in stability

only partially offsets fluctuations in economic activity.

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should

reduce tax rates and/or increase government spending.

Recessions have contributed to the public debt by

reducing national income and therefore tax revenues.

The most likely way the public debt burdens future generations, if at all, is by

reducing the current level of investment.

A major advantage of the built-in or automatic stabilizers is that they

require no legislative action by Congress to be made effective.

The effect of expansionary fiscal policy is shown as a

rightward shift in the economy's aggregate demand curve.

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes

the crowding-out effect.

The public debt is the amount of money that

the federal government owes to holders of U.S. securities.