Macroeconomics Final Review
Crowding out occurs when the government:
Borrows money, thus making it more difficult for the private sector to borrow.
T/F Approximately 20% of the expenditures in the federal budget are "uncontrollable"
False
T/F In general, a budget surplus tends to change the mix of output in the direction of more public sector goods and fewer private sector goods
False
T/F They cyclical deficit narrows when unemployment or inflation increase
False
T/F automatic stabilizers reduce government expenditures and decreased budget deficits when the economy is in a recession
False
a budget deficit is incurred whenever
Tax revenues fall short of expenditures over the fiscal year.
T/F When foreigners help finance US deficit, US residents can consume more than they produce
True
T/F according to Keynes, a balanced budget would be appropriate only if all other injections and leakages were in balance and the economy was in full employment.
True
T/F part of the deficit arises from cyclical changes in the economy, the rest is the result of discretionary fiscal policy
True
T/F the national debt is both an asset and a liability to future generations
True
getting the timing right can be more difficult with one of these policies. which one? a. fiscal policy b. monetary policy c. environmental policy d. all of the above
a
externally held US dent results in
a burden to the United States when foreign owned bonds are cashed in and the proceeds are used to buy goods and services produced in the United States
what is the long-run effect of a permanent increase in government spending?
a decline in investment, consumptions, and net exports that exactly offsets the increase in government purchases, therefore aggregate demand remains unchanged
when the federal government runs a budget surplus, it is
adding a leakage to the circular flow
higher interest rates in the United States will attract foreign investors. This will cause _______________ in the exchange rate between the dollar and the other currencies, and _______________
an increase, a decrease
Changes in taxes and spending that happen without actions by the government are called
automatic stabilizers
Every time the federal government runs a budget deficit, the Treasury must
borrow funds from savers by selling Treasury securities
deficit spending can be financed in the same year by
borrowing from foreign sources, borrowing from the banking system and the private sector, and US treasury bonds.
An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________.
contractionary; fall; fall
which of the following uses of a budget surplus has the potential of increasing the private sector's portion output?
cutting taxes, paying off a portion of the national debt, increasing transfer payments
when the government takes actions to change taxes and spending, the type of policy involved is called
discretionary fiscal policy
Deficit spending results whenever the government
finances expenditures that exceed tax revenues
in contrast to the structural deficit, the cyclical deficit reflects
fluctuations in economic activity
which of the following was a period of federal budget surpluses?
from 1998 through 2006
what is the relationships between government purchases and government expenditures
government expenditures include government purchases
which of the following is true of nay permanent increase in government purchases in the long run>
in the long run, any permanent increase in government purchase must come at the expense of private expenditures
when the economy is in a recession, the government can
increase government purchase or decrease taxes in order to increase aggregte demand
the magnitude of a fiscal stimulus is measured by
increase in the structural deficit (or decrease in the structural surplus)
According to the crowding-out effect, if the federal government increases spending, the demand for money and the equilibrium interest rate will_____________, which will cause some consumption investment, and net exports to______________
increase, decrease
budget deficits automatically __________ during recessions and ____________ during expansions
increase, decrease
which of the following are the largest sources of federal government revenue?
individual income taxes and social security taxes
discretionary fiscal spending includes
interest payments on the national debt, medicare benefits, pensions for retired government workers
the cyclically adjusted budget deficit,
is measured as if the economy were at potential real GDP.
The U.S. government increase spending for the defense and homeland security after 2001 to fund the war on terrorism and the invasion of Iraq. these spending increases are considered
part of the defense and homeland security, but not fiscal policy
which of the following will reduce the inflation rate>
reducing government purchases or increasing taxes
we would expect the tax multiplies to be __________________ in absolute value than the government purchases multiplier
smaller
because they can quickly change policy in response to chaining economic conditions
the Red plays a larger role in stabilizing the economy than the president and congress
according to Keynes, it was acceptable for the budget to be unbalanced if
the economy was below full employment, leakages and injections were out of balance, and the economy was above full employment
the major reason budget deficits were reduced during the 1990s and surpluses were experienced in 1998-2001 was
the growing us economy
economists believe that the smaller that tax wedge for any economic activity, such as working, saving, investing, or starting a business
the more of that economic activity that will occur
which of the following is the main reason for the long-run funding problems of social security?
the number of workers per retiree continues to decline
which of the following statements is incorrect
the only difference between fiscal policy and monetary policy in fighting recessions and stimulating spending is where the money comes from
automatic stabilizers tend to stabilize the level of economic activity because
they increase spending during recession and decrease spending during inflationary periods
which of the follow statements about the federal debt is corredt?
us the debt becomes very large relative to the economy, then the government may have to raise taxes to high levels, or cut back on other types of spending to make interest payments on the debt
If all of the national debt were owned internally, then:
we would still have to worry about the effect of interest payments on the distribution of income
tax simplification and reductions in tax rates will result in
additional shifts to the right in LRAS leading to a lower price level and higher real GDP
at the end of june 2007, the federal government debt was $8.9 trillion. More than half of this debt was held by
agencies of the federal government
which of the following fiscal policy actions will increase real GDP in the short run?
an increase in government expenditures
which of the following policies can the government use to pay for Social Security in the future?
an increase in income taxes, a decrease in social security benefits, a decrease in spending for other government programs
The effect on the economy of tax reduction and simplification is
an increase in the quality of real GDP supplied at every price level, or a shift in the long-run aggregate supply curve
to obtain a more accurate measure of the effects on the economy of the government's spending and tax policies, economists prefer to look at
the cyclically adjusted budget deficit or surplus
which of the following are categories of federal government expenditures?
transfer payments, interest on national debt, grants to state and local government
the structural deficit represents
Federal revenues minus federal expenditures at full employment under current fiscal policy.
which of the following statements about the US national debt is not correct? a. the national debt represents both a liability and an asset. b. the primary burden of the debt incurred when the deficit-financed activity tales place c. the primary economic cost of the debt are being passed on the future generations d. future generations will bear some of the debt burden when it is externally financed
c
Crowding out refers to
the decline in private expenditures that result from an increase in government purchases
the global expansionary fiscal policy is
to increase aggregate demand
the largest and fastest growing category of federal expenditure is
transfer payments
T/F discretionary fiscal policy is stimulative if the structural deficit is shrinking (the surplus is growing)
False
T/F the true burden of the debt is the reduction in national wealth when the federal government borrows money by selling bonds
False
Spending on most of the federal government's day-to-day activities—including running federal agencies like the Environmental Protection Agency, the FBI, the National Park Service, and the Immigration and Customs Enforcement—make up
less than 10% of federal government expenditures
the multiplier effect consists of
a series of induced increases in consumption spending that result from an initial increase in autonomous spending
the the federal government's expenditures are greater than its revenue, there is a
budget deficit
by how much will equilibrium real GDP increase as a result of a $100 billion increase in government purchases?
by more than $100 billion
When the U.S. Treasury issues new bonds to replace bonds that have matured, it is engaging in
debt financing
When the tax rate increases, the size of the multiplier effect:
decreases
is a tax cut has supply-side effects, then
it will affect both aggregate demand and aggregate supply
how would you decompose the total effect of an increase in government purchases on the aggregate demand curve (note: the magnitude of the shifts don't have to be the same.)
the aggregate demand curve shifts as a result of two distinct effects, twice to the right
a deficit ceiling limits
the amount by which government spending can exceed government revenue
the tax multiplier equals
the change in equilibrium GDP divided by the change in taxes