What is the cyclically adjusted budget deficit or surplus?
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The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were at potential GDP.
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Suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into recession, what will happen to the federal budget?
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If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.
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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?
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In this case, Congress and the president should enact policies that increase government spending and decrease taxes.
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What changes should they make if they decide a contractionary fiscal policy is necessary?
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In this case, Congress and the president should enact policies that decrease government spending and increase taxes.
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Which of the following is not a correct comparison between an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
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All of the following are correct statements about the two models:
-If the economy is below full employment, expansionary fiscal policy will cause an increase in the price level in both models.
-In the dynamic model, expansionary policy would be used when demand does not grow sufficiently; in the basic model, expansionary policy would be used when demand falls.
-The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static.
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Does government spending ever reduce private spending?
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Yes, due to crowding out
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Suppose that at the same time Congress and the president pursue an expansionary fiscal policy, the Federal Reserve pursues an expansionary monetary policy.
How might an expansionary monetary policy affect the extent of crowding out in the short run?
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An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out
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Which of the following are categories of federal government expenditures?
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-Transfer payments
-grants to state and local governments
-interest on the national debt
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The largest and fastest-growing category of federal expenditures is
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transfer payments
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The federal government's day-to-day activities include running federal agencies like the Environmental Protection Agency, the FBI, the National Park Service, and the Immigration and Customs Enforcement.
Spending on these types of activities make up
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less than 10 percent of federal government expenditures.
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Increased government debt can lead to higher interest rates and, as a result, crowding out of private investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the economy?
answer
-Debt-spending on research and development.
-Debt-spending on highways and ports.
-Debt-spending on education.
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Assume the tax multiplier is estimated to be 1.7
and the aggregate supply curve has its usual upward slope. Suppose the government lowers taxes by $134 million.
Aggregate demand will___________ by $_________ million.
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- increase
-27.8
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What is fiscal policy?
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Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
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Who is responsible for fiscal policy?
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The federal government controls fiscal policy.
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Changes in taxes and spending that happen without actions by the government are called
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Automatic stabilizers
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If the government cuts taxes in order to increase aggregate demand, the action is called
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a discretionary fiscal policy.
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When actual GDP is below potential GDP the budget deficit increases because of:
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an increase in transfer payments and a decrease in tax revenues.
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In the long run, government tax policy can affect private investment which impacts the production function and factors of production. In other words, aggregate supply may be impacted by different types of taxes the government can use.
Which of the following is not true in terms of potential long run impacts of tax policies?
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A tax rebate given one year will cause people to have more money and therefore they will spend more which will cause an increase in aggregate supply.
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Suppose the government increases expenditures by $50 billion and the marginal propensity to consume is 0.90. By how will equilibrium GDP change?
The change in equilibrium GDP is: $________ billion
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500
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When is it considered "good policy" for the government to run a budget deficit?
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When borrowing is used for long-lived capital goods.
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When the economy is experiencing an expansion automatic stabilizers will cause:
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transfer payments to decrease and tax revenues to increase.
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The multiplier effect is only a consideration for increases in government purchases.
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False
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____________ ______________are spending by the government on goods, services, and factors of production.
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Government Purchases
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_______________ _________________represent total government spending including goods, services, grants to state and local governments, and transfer payments.
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Government Expenditures
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Since the 1950s, total government expenditures, as a percentage of GDP, have ______________ and total government purchases, as a percentage of GDP, have ______________.
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Increased
Decreased
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The major cause of these trends is
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there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance.
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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?
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The impact of the multiplier would be larger if the SRAS curve is horizontal.
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What is an expansionary fiscal policy?
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Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.
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What is a contractionary fiscal policy?
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Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.
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In 2017, in proposing a $1 trillion increase in government spending on infrastructure, President Trump argued that the spending would increase total employment in the United States.
In the short run, increases in federal spending will increase real GDP and employment if
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the economy is producing at less than its potential output and has some cyclical unemployment.
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In 2017, in proposing a $1 trillion increase in government spending on infrastructure, President Trump argued that the spending would increase total employment in the United States.
The federal government would not want to increase its spending, even if the result were to increase real GDP and employment in the short run, if
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it would lead to a greater federal deficit and an increase in the national debt.
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In 2017, in proposing a $1 trillion increase in government spending on infrastructure, President Trump argued that the spending would increase total employment in the United States.
President Trump was assuming that in 2017, the economy was
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able to create more jobs and expand without increasing the inflation rate.
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As a result of crowding out in the short run, the effect on real GDP of an increase in government spending is often
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less than the increase in government spending
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Which can be changed more quickly: monetary policy or fiscal policy?
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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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What is meant by crowding out?
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Crowding out is a decline in private expenditures as a result of increases in government purchases.
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Which of the following best describes the difference between crowding out in the short run and in the long run?
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In the short run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.
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Why might cutting government spending as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing inflation?
answer
The legislative process experiences longer delays than monetary policy.
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