Chapter 16

2 October 2022
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question
Economist Mark Thoma has​ written, "One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement. ... Automatic stabilizers bypass this difficulty by doing exactly what their name​ implies." ​Source: Mark​ Thoma, "The Importance of Automatic Stabilizers to the​ Economy," cbsnews.com​, January​ 25, 2010. Automatic stabilizers are A. changes in business taxes that occur when the economy slows down. B. changes in the money supply that occur automatically when money demand changes. C. budgetary cuts that occur automatically at the end of the fiscal year if there is a deficit. D. government spending and taxes that automatically increase or decrease along with the business cycle.
answer
D. government spending and taxes that automatically increase or decrease along with the business cycle.
question
What is an expansionary fiscal​ policy? A. Expansionary fiscal policy includes decreasing government spending and increasing taxes to increase aggregate demand. B. Expansionary fiscal policy includes increasing government spending and taxes to increase aggregate demand. C. Expansionary fiscal policy includes decreasing government spending and taxes to increase aggregate demand. D. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.
answer
D. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.
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What is fiscal​ policy? A. Fiscal policy can be described as changes in interest rates to achieve macroeconomic policy objectives. B. Fiscal policy can be described as changes in government spending and interest rates to achieve macroeconomic policy objectives. C. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives. D. Fiscal policy can be described as changes in interest rates and taxes to achieve macroeconomic policy objectives.
answer
C. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
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If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes? A. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes. B. In this​ case, Congress and the president should enact policies that decrease government spending and decrease taxes. C. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes. D. In this​ case, Congress and the president should enact policies that increase government spending and increase taxes.
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A. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes.
question
The graph to the right illustrates the static​ AD-AS model. Suppose the economy is initially in​ long-run equilibrium at point A. The government decides to increase taxes. In the​ short-run, this contractionary fiscal policy will​ cause: A. A shift from SRAS 2 to SRAS 1 and a movement to point​ B, with a lower price level and higher output. B. A shift from SRAS 1 to SRAS 2 and a movement to point​ A, with a higher price level and the same output. C. A shift from AD 2 to AD 1 and a movement to point​ D, with a lower price level and lower output. D. A shift from AD 1 to AD 2 and a movement to point​ B, with a higher price level and higher output.
answer
C.A shift from AD 2 to AD 1 and a movement to point​ D, with a lower price level and lower output.
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Suppose the economy is initially in​ long-run equilibrium. The government enacts a policy to decrease taxes. In the​ short-run, this expansionary fiscal policy will​ cause: A. A shift from AD 1 to AD 2 and a movement to point​ B, with a higher price level and higher output. B. A shift from SRAS 1 to SRAS 2 and a movement to point​ B, with a lower price level and higher output. C. A shift from AD 2 to AD 1 and a movement to point​ C, with a lower price level and the same output. D. A shift from SRAS 2 to SRAS 1 and a movement to point​ D, with a higher price level and lower output.
answer
A. A shift from AD 1 to AD 2 and a movement to point​ B, with a higher price level and higher output.
question
Which of the following accurately defines the government purchases multiplier and the tax​ multiplier? ​(Note: The symbol Upper Delta represents​ "Change in.")
answer
Gov, Multipolier = Delta equilibrium real GDP / Delta Gov Purchase Tax multiplier = Delta equilibrium real GDP / delta in taxes
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If the​ short-run aggregate supply curve​ (SRAS) were a horizontal​ line, what would be the impact on the size of the government purchases and tax multipliers LOADING...​? A. The impact of the multiplier would be impossible to determine if the SRAS curve is horizontal. B. The impact of the multiplier would not be changed if the SRAS curve is horizontal. C. The impact of the multiplier would be smaller if the SRAS curve is horizontal. D. The impact of the multiplier would be larger if the SRAS curve is horizontal.
answer
D. The impact of the multiplier would be larger if the SRAS curve is horizontal.
question
Which can be changed more​ quickly: monetary policy or fiscal​ policy? A. Fiscal policy can be changed more quickly than monetary policy. Monetary policy has much longer delays due to the larger number of legislators involved. B. Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy. C. Monetary policy can be changed more quickly than fiscal policy. Fiscal policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy. D. Fiscal policy can be changed more quickly than monetary policy. Fiscal policy has much shorter delays due to the smaller number of legislators involved.
answer
B. Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.
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The term​ "crowding out" refers to a situation​ where:
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Government spending increases interest rates and decreases private investment.
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Why do few economists argue that it would be a good idea to balance the federal budget every​ year? A. To keep a balanced budget during a​ recession, taxes would have to increase and government expenditures would have to​ decrease, which would further reduce aggregate demand and deepen the recession. B. To keep a balanced budget during a​ recession, taxes would have to decrease and government expenditures would have to​ increase, which would further reduce aggregate demand and deepen the recession. C. To keep a balanced budget during an​ expansion, taxes would have to decrease and government expenditures would have to​ increase, which would increase aggregate demand and decrease inflation. D. To keep a balanced budget during an​ expansion, taxes would have to increase and government expenditures would have to​ decrease, which would increase aggregate demand and lead to inflation.
answer
A. To keep a balanced budget during a​ recession, taxes would have to increase and government expenditures would have to​ decrease, which would further reduce aggregate demand and deepen the recession.
question
Wall Street Journal writers Josh Zumbrun and Nick Timiraos published answers to several of their​ readers' questions regarding the federal​ government's debt. Two of the questions​ were: "Why is government debt different from​ mine?" and​ "How important is it to pay off this​ debt?" ​Source: Josh Zumbrun and Nick​ Timiraos, "Q&A: What the​ $18 Trillion National Debt Means for the U.S.​ Economy," Wall Street Journal​, February​ 1, 2015. Government debt is different from household debt because A. government debt is much less important than household debt. B. the government only has to make interest​ payments, but households have to make payments on the principal too. C. there are many more households than governments. D. households cannot tax to bring in revenue and so will default if they​ can't make the payments.
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D. households cannot tax to bring in revenue and so will default if they​ can't make the payments.
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If the government increases expenditure without raising​ taxes, this will
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increase the budget deficit and require the government to borrow additional funds. Cause interest rate to increase thereby reducing private investment and crowing out the private sector Cause a decrease in the domestic exchange rate which will increase exports and decrease imports
question
When is it considered​ "good policy" for the government to run a budget​ deficit? A. When borrowing is used for current expenses. B. When borrowing is used for​ long-lived capital goods. C. When borrowing is used to pay for social insurance programs. D. All of the above.
answer
B. When borrowing is used for​ long-lived capital goods.
question
Budget deficits automatically​ __________ during recessions and​ __________ during expansions. A. ​increase; increase B. ​decrease; decrease C. ​increase; decrease D. ​decrease; increase
answer
C. increase; decrease