Ch 16 And 17

1 October 2022
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Fiscal policy refers to changes in
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federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
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Which of the following would be classified as fiscal‚Äč policy?
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The federal government cuts taxes to stimulate the economy.
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Automatic stabilizers refer to
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government spending and taxes that automatically increase or decrease along with the business cycle.
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The increase in the amount the government collects in taxes when the economy expands and the decrease in the amount the government collects in taxes when the economy goes into a recession is an example of
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automatic stabilizers.
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The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of
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automatic stabilizers.
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The largest and fastestminus‚ąígrowing category of federal government expenditures is
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transfer payments.
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From the 1960s to‚Äč 2014, transfer payments
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have risen from 25 percent to about 48 percent of federal government expenditures.
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The three categories of federal government‚Äč expenditures, in addition to government‚Äč purchases, are
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interest on the national‚Äč debt, grants to state and local‚Äč governments, and transfer payments.
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The largest source of federal government revenue in 2014 was
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The largest source of federal government revenue in 2014 was
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Fiscal policy is defined as changes in federal‚Äč ________ and‚Äč ________ to achieve macroeconomic objectives such as price‚Äč stability, high rates of economic‚Äč growth, and high employment.
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‚Äčtaxes; expenditures
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Which of the following would be considered a fiscal policy‚Äč action?
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A tax cut is designed to stimulate spending during a recession.
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Expansionary fiscal policy involves
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increasing government purchases or decreasing taxes.
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Refer to the diagram to the right. An increase in taxes would be depicted as a movement from‚Äč _______, using the static AD
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Down the SRAS
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If the economy is falling below potential real‚Äč GDP, which of the following would be an appropriate fiscal policy to bring the economy back to‚Äč long-run aggregate‚Äč supply? An increase in
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government purchases.
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Which of the following is considered contractionary fiscal‚Äč policy?
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Congress increases the income tax rate
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Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be‚Äč ________ and real GDP to be‚Äč ________.
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‚Äčhigher; higher
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Expansionary fiscal policy will
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shift the aggregate demand curve to the right.
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Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real‚Äč GDP?
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an increase in government purchases
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To combat a recession with discretionary fiscal‚Äč policy, Congress and the president should
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decrease taxes to increase consumer disposable income.
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If real GDP exceeded potential real GDP and inflation was‚Äč increasing, which of the following would be an appropriate fiscal‚Äč policy?
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an increase in taxes
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Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be‚Äč ________ and real GDP to be‚Äč _________.
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‚Äčlower; lower
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Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal‚Äč policy? A significant
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increase in inflation.
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The government purchases multiplier equals the change in‚Äč ________ divided by the change in‚Äč ________.
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equilibrium real‚Äč GDP; government purchases
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The tax multiplier equals the change in‚Äč ________ divided by the change in‚Äč ________.
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equilibrium real‚Äč GDP; taxes
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Suppose the government spending multiplier is 2. The federal government cuts spending by‚Äč $40 billion. What is the change in GDP if the price level is not held‚Äč constant?
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a decrease of less than‚Äč $80 billion
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An increase in government purchases of‚Äč $200 billion will shift the aggregate demand curve to the right by
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more than‚Äč $200 billion.
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Suppose real GDP is‚Äč $13 trillion, potential real GDP is‚Äč $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price‚Äč level, Congress and the president would need to increase government purchases by
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less than‚Äč $500 billion.
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Crowding out refers to a decline in‚Äč ________ as a result of an increase in‚Äč ________.
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private‚Äč expenditures; government purchases
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The crowding out of government spending by private spending will be greater the
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more sensitive‚Äč consumption, investment, and net exports are to changes in interest rates.
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An increase in the sensitivity of private spending‚Äč (consumption, investment, and net‚Äč exports) to changes in the interest rate‚Äč ________ the government purchases multiplier.
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will decrease
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Crowding‚Äč out, following an increase in government‚Äč spending, results from‚Äč (the exchange rate is the foreign exchange price of the domestic‚Äč currency)
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higher interest rates and a higher exchange rate.
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An increase in government spending may expedite recovery from a recession in the short‚Äč run, but in the long run this policy may
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make domestic businesses less competitive in international markets as the dollar appreciates in value. raise interest rates and reduce consumer expenditures on automobiles and new houses. reduce investment in new capital.
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‚ÄčHistorically, the largest U.S. federal budget deficits as a percentage of GDP in the 20th century occurred during
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WWI and WWII.
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‚Äč1997, the U.S. federal government was
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in deficit every year.
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A recession tends to cause the federal budget deficit to‚Äč ________ because tax revenues‚Äč ________ and government spending on transfer payments‚Äč _________.
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‚Äčincrease; fall; rise
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An economic expansion tends to cause the federal budget deficit to‚Äč ________ because tax revenues‚Äč ________ and government spending on transfer payments‚Äč ________.
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‚Äčdecrease; rise; fall
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The federal government debt equals
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the total value of U.S. Treasury bonds outstanding.
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The federal government debt as a percentage of GDP fell
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1998-2001
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If the federal‚Äč government's expenditures are less than its tax‚Äč revenues, then
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a budget surplus results.
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Government deficits tend to increase during
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periods of war and recession.
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During‚Äč recessions, government expenditure automatically
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rises because of programs such as unemployment insurance and Medicaid.
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The curve showing the short‚ąírun relationship between the unemployment rate and the inflation rate is called
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the phillips curve
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According to the short‚ąírun Phillips‚Äč curve, the unemployment rate and the inflation rate are
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negatively related.
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According to the short‚ąírun Phillips‚Äč curve, which of the following would result in low rates of‚Äč unemployment?
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a higher inflation rate
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What is the natural rate of‚Äč unemployment?
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the unemployment rate that exists when the economy is at potential GDP
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In the long‚Äč run, the Phillips curve is a‚Äč ________ at‚Äč ________.
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vertical‚Äč line; the natural rate of unemployment