quiz 7 fiscal policy

If the MPC in an economy is 0.9, the government could shift the aggregate demand curve rightward by $40 billion by

increasing government purchases by $4 billion.

Using fiscal policy to stabilize the economy is difficult because

there are time lags involved in the use of fiscal policy.

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net exports = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

A decrease in government purchases and an increase in taxes

What combination would most likely cause a shift from AD1 to AD2?

A decrease in taxes and an increase in government purchases

Which of the following expenses are a part of the U.S. government's discretionary spending?

Education spending

The existence of lags in designing and implementing fiscal policy helps illustrate some of the limitations of fiscal policy aimed at easing the burdens of a recession. Which of the following statements best describes a situation when fiscal policy is more appropriate?

The economy is slow to self-correct or the recession is very severe.

Economy X has total government debt of $40,000 and Nominal GDP 60,000. Economy Y has total government debt of $32,000 and Nominal GDP 16,000. (Hint: Economy X is more like the United States; Economy Y is more like Greece in 2011.)

Y has a more severe debt problem than X.

The set of fiscal policies that would be most contractionary would be a(n)

decrease in government purchases and an increase in taxes

Which of the following would not be considered an automatic stabilizer?

defense spending

When the federal government changes purchases and/or taxes to stimulate the economy or rein in inflation, such policy is

discretionary fiscal policy

As the economy contracts, tax revenues

fall and transfer payments rise, causing the economy to contract by less than it would in the absence of automatic stabilizers.

Which of the following is an example of built-in stability? As real GDP decreases,

income tax revenues decrease and transfer payments increase.

As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system

serves as an automatic stabilizer for the economy.

Payments made by the government that do not require an exchange of economic activity in return are also known as

transfer payment

In the economy, tax revenue collected by the government this year is $15 million and government outlays are $13 million. This country currently has a ____.

budget surplus of $2 million

you are an economic advisor to the president. You observe a decrease in gross investment. Assume the economy was operating at the full-employment level of real GDP prior to the decrease in gross investment. Describe the state of the economy and advise the president on the appropriate policy action by completing the following sentences. a. The decrease in gross investment will lead to

a. The decrease in gross investment will lead to a *decrease* in aggregate demand. As a result, real GDP will *decrease* b. The problem that this event will cause is *increased unemployment* c. Appropriate *expansionary* policy actions would include *decreasing* taxes and/or *increasing* government purchases. d. These actions will smooth out the business cycle by *increasing* actual real GDP back toward full-employment GDP.

Suppose the federal government observes an increase in gross investment. Examine this event in terms of the aggregate demand and aggregate supply model.

a. The increase in gross investment will cause an *increase in aggregate demand* b. This will lead to an *increase* in the price level and an *increase* in real GDP. c. *Contractionary* fiscal policy will be used to *reduce inflation*. d. The fiscal policy actions may include an* increase* in taxes and/or a *decrease* in government purchases. e. The goal of fiscal policy is to *smooth out business cycles*

Unemployment compensation is

an automatic stabilizer because it falls as income increases, slowing an economic expansion.

First time home buyers tax credit in 2009 was an example of ____.

an expansionary fiscal policy

One advantage of automatic stabilizers over discretionary fiscal policy is that automatic stabilizers

are not subject to the timing problems of discretionary fiscal policy.