Macroeconomics Chapter 16 (Final Exam) HSU

Looking at the supply-side effects on aggregate supply shows that a tax hike on labor income

(A) weakens the incentive to work; (B) decreases potential GDP Both answers A and B are correct.

A fiscal stimulus works to close a recessionary gap by shifting the

AD curve rightward.

The law-making time lag is best described as the time that it takes

Congress to pass laws needed to change taxes or spending.

When tax revenues equal government outlays, the situation is referred to as

a balanced budget.

National debt decreases in a given year when a country has

a budget surplus.

The magnitude of the tax multiplier is smaller than the magnitude of the government expenditure multiplier because

a change in taxes does not change expenditures by as much as the same size change in government expenditure.

In the United States for the year 2012, the federal government had a _____ so the national debt was _____.

budget deficit; increasing

Government expenditure _____ change potential GDP and taxes _____ change potential GDP.

can; can

In order to help the economy recover from a recession using fiscal policy, the government can _____ so that aggregate demand increases.

cut taxes

An example of a discretionary fiscal stimulus policy is

cutting taxes.

Which of the following is an example of a fiscal stimulus?

decrease in taxes

The magnitude of the government expenditure multiplier is _____ the magnitude of the tax multiplier.

greater than

The magnitude of the tax multiplier is _____ the magnitude of the government expenditure multiplier.

greater than

The balanced budget multiplier is

greater than zero and less than the government expenditure multiplier.

When the government's expenditures exceed its tax revenues, the budget

has a deficit and the national debt is increasing.

When tax revenues exceed the government's outlays, the budget

has a surplus and the nation debt is decreasing.

A reason why discretionary fiscal policy might move the economy away from potential GDP instead of toward potential GDP is that

it is difficult to know whether real GDP is above or below potential GDP.

When tax revenues _____ outlays is negative, then the government has a budget _____.

minus; deficit

When tax revenues _____ outlays is positive, then the government has a budget _____.

minus; surplus

The use of the federal budget to achieve macroeconomic objectives of full employment and sustainable economic growth is

called fiscal policy.

An increase in income taxes _____ employment and _____ potential GDP.

decreases; decreases

Increasing the income tax rate _____ the _____.

decreases; supply of labor

An increase in the income tax _____ potential GDP by shifting the labor _____ curve _____.

decreases; supply; leftward

The government collects tax revenues of $100 million and has $105 million in outlays. The budget balance is a

deficit of $5 million.

When government outlays exceed tax revenues, the situation is called a budget

deficit.

The supply-side effects of a change in taxes on labor income means that _____ in taxes on labor income shifts the _____.

an increase; labor supply curve leftward

The balanced budget multiplier is

positive because the magnitude of government expenditure multiplier is larger than the magnitude of tax multiplier.

Increasing the income tax rate _____ the before-tax real wage rate and _____ the after-tax real wage rate.

raises; lowers

Automatic changes in tax revenues and expenditures that occur as a result of fluctuations in real GDP are referred to as automatic

stabilizers.

The actual budget deficit is equal to the

structural deficit plus the cyclical deficit.

The government has a budget surplus if

tax revenues are greater than outlays.

If the federal government has a budget surplus, then it is definitely the case that

tax revenues exceeds government outlays.

The quantity of employment is determined in the _____ market and that quantity, along with the _____, determines potential GDP.

labor market; production function

Discretionary fiscal policy is handicapped by

law-making time lags, estimation of potential GDP, and economic forecasting.

An increase in taxes on labor income shifts the labor supply curve _____, and the _____.

leftward; after-tax wage rate falls

The tax multiplier is the

magnification effect of a change in taxes on aggregate demand.

Automatic stabilizers are defined as

policy that stabilizes without the need for action by the government.

Needs-tested spending is defined as

spending on programs for people qualified to receive benefits.

Once supply side effects are taken into account, tax cuts for labor income can change i. the supply of labor. ii. potential GDP. iii. the growth rate of potential GDP.

i and ii

When tax revenues minus outlays is i. positive, the government has a budget surplus. ii. negative, the government has a budget deficit. iii. zero, the government has a balanced budget.

i, ii, and iii

When the government's outlays equal its tax revenues, then the budget

is balanced.

An income tax hike

decreases potential GDP.

Induced taxes are defined as taxes

that vary with real GDP.

What two parts of the government determine the federal budget?

the Congress and the President

As contrasted to the Keynesian view, mainstream economists believe that _____ than Keynesian economists believe.

the effects from fiscal stimulus are weaker

As contrasted to the mainstream view, Keynesian economists believe that _____ than mainstream economists believe.

the multiplier effect is larger

Mainstream economists believe that Keynesian economists overstate the effect of the multiplier effect. Which of the following statements would mainstream economists NOT consider to be accurate?

A fiscal stimulus is a vital tool to fight recession and depression due to the multiplier effect.

The last U.S. president to be in office when the government had a budget surplus was

Bill Clinton.

The _____ view says that fiscal stimulus has a multiplier effect that makes it a _____ tool to fight a deep recession.

Keynesian; powerful

An example of automatic fiscal policy is

a decrease in tax revenues, triggered by the state of the economy.

If the economy is in equilibrium with real GDP less than potential GDP, there is _____ gap, and a fiscal policy that _____ is appropriate.

a recessionary; increases aggregate demand

The federal budget is defined as

an annual statement of expenditures and tax revenues of the U.S. government.

In an expansion, federal tax revenues increase proportionally more than real GDP without the need for any government policy. This increase is an example of

automatic fiscal policy.

Fiscal policies that move the economy toward potential GDP without a change in policy are called

automatic stabilizers.

An example of automatic fiscal policy is

expenditure for unemployment benefits increasing as economic growth slows.

An increase in government expenditure can _____ potential GDP and an increase in taxes can _____ potential GDP.

increase; decrease

Which of the following is an example of an automatic fiscal policy action?

increased unemployment benefit payments resulting from higher unemployment

If a tax cut increases people's labor supply, then the tax cut

increases potential GDP.

The supply-side effects show that a tax cut on labor income _____ employment and _____ potential GDP.

increases; increases

When taxes are cut, aggregate demand _____ and aggregate supply _____.

increases; increases

Taxes that change with the level of real GDP and income are called

induced taxes.

Discretionary fiscal policy is defined as fiscal policy

initiated by an act of Congress.