Unit 9 Concept Checks

In the model of aggregate expenditure, government spending affects the value of equilibrium income through a change in the value of:

autonomous spending.

In the model of aggregate expenditure, the lump sum tax affects the value of equilibrium income through a change in the value of:

autonomous spending.

To put into perspective the size of the federal budget deficit or surplus over time, economists prefer to measure the

budget deficit or surplus as a percentage of GDP.

Tax cuts on business income increase aggregate demand by increasing

business investment spending.

Because of the multiplier effect, the aggregate demand curve will shift to the right ________ an initial increase in government purchases.

by more than

The aggregate demand curve will shift to the left ________ an initial decrease in government purchases.

by more than

Fiscal policy refers to changes in

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

If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 billion, then the economy

must be below potential real GDP.

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

private expenditures; government purchases

Fiscal policy has a multiplier effect. This means that when government spending increases or taxes decrease, the resulting increase in aggregate demand is:

larger than the anticipated increase caused by these measures alone.

Expansionary fiscal policy will

shift the aggregate demand curve to the right.

The problem causing most recessions is too little

spending.

Which of the following describes the crowding out effect of government spending?

↑G → ↑AE → ↑AD → ↑Y → ↑MD → ↑r → ↓I

Which of the following would be classified as fiscal policy?

The federal government cuts taxes to stimulate the economy.

An increase in government spending causes __________ in real GDP, while an increase in the lump sum tax causes __________ in real GDP.

an increase; a decrease

The net effect of an increase in government spending and an equal and simultaneous increase in the lump sum tax results in:

an increase in equilibrium GDP.

Government spending is considered:

an injection, similar to investment.

In the model of aggregate expenditure, government spending causes

an upward shift of the aggregate expenditure function.

The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was

at potential GDP.

The multiplier of a lump sum tax?

-b/(1 - b)

Which of the following is the multiplier of a lump sum tax?

-b/(1 - b)

The balanced-bduget multiplier equals

1

Which of the following is the multiplier of a an income tax?

1/(1 - b + bt)

The multiplier of government spending equals:

1/(1 - b)

Which of the following is the multiplier of government spending?

1/(1 - b)

Which of the following is considered contractionary fiscal policy?

Congress increases the income tax rate.

In the model of aggregate expenditure, imposition of an income ax causes

A clockwise rotation of the aggregate expenditure function.

Which mix of economic policies is fully expansionary?

Higher money supply, higher government spending, and lower taxes.

Which of the following provides health-care coverage to people age 65 and over?

Medicare

In the model of aggregate expenditure, imposition of a lump sum tax causes

a downward shift of the aggregate expenditure function.

A lump-sum tax is considered:

a leakage, similar to saving.

Compared to our two-sector economy without taxes, the economy with the income tax has:

a lower multiplier and same value of autonomous spending

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

decrease taxes to increase consumer disposable income.

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

decrease; rise; falls

Imposition of a lump-sum tax :

decreases disposable income, consumption and GDP.

Imposition of an income tax :

decreases disposable income, consumption and GDP.

An increase in individual income taxes ________ disposable income, which ________ consumption spending.

decreases; decreases

Decreasing government spending ________ the price level and ________ equilibrium real GDP.

decreases; decreases

Government spending on infrastructure projects is an example of ________ aimed at increasing real GDP and employment.

discretionary fiscal policy

Congress and the president carry out fiscal policy through changes in

government purchases and taxes.

Automatic stabilizers refer to

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

During a typical recession, the actual deficit is ___________ the cyclically-adjusted budget deficit .

greater than

When we say that fiscal policy has a crowding out effect, we mean that:

higher government spending expands the public sector but contracts the private sector.

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

If government spending increases by $50 billion and a lump sum tax of $50 billion is simultaneously imposed, the value of GDP will:

increase by $50 billion.

A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

increase; fall; rises

An increase in government spending:

increases GDP.

The federal government debt ________ when the federal government runs a deficit and ________ when the federal government runs a surplus.

increases; decreases

Fiscal policy has a crowding out effect because an increase in government spending eventually ___________ the demand for money, therefore it ___________ the interest rate, and consequently ____________ investment.

increases; increases; decreases

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes.

The largest source of federal government revenue is:

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.

For the federal deficit to be lowered

the federal government's expenditures must be lower than its tax revenue.

In the model of aggregate expenditure, the income tax affects the value of equilibrium income through a change in the value of:

the multiplier.

Compared to our two-sector economy without taxes, the three-sector economy with government spending has:

the same multiplier and higher value of autonomous spending.

Compared to our two-sector economy without taxes, the economy with a lump sum tax has:

the same multiplier and lower value of autonomous spending.

The national debt is:

the sum of accumulated yearly deficits.