Chapter 16

18 October 2022
4.7 (114 reviews)
37 test answers

Unlock all answers in this set

Unlock answers (33)
question
What is the cyclically adjusted budget deficit or‚Äč surplus?
answer
The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal‚Äč government's budget if the economy were at potential GDP.
question
Suppose that the economy is currently at potential‚Äč GDP, and the federal budget is balanced. If the economy moves into‚Äč recession, what will happen to the federal‚Äč budget?
answer
If the budget is balanced at potential GDP and the economy moves into‚Äč recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.
question
If Congress and the president decide an expansionary fiscal policy is‚Äč necessary, what changes should they make in government spending or‚Äč taxes?
answer
In this‚Äč case, Congress and the president should enact policies that increase government spending and decrease taxes.
question
What changes should they make if they decide a contractionary fiscal policy is‚Äč necessary?
answer
In this‚Äč case, Congress and the president should enact policies that decrease government spending and increase taxes.
question
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‚Äč model?
answer
All of the following are correct statements about the two models: -If the economy is below full‚Äč employment, expansionary fiscal policy will cause an increase in the price level in both models. -In the dynamic‚Äč model, expansionary policy would be used when demand does not grow‚Äč sufficiently; in the basic‚Äč 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.
question
Does government spending ever reduce private‚Äč spending?
answer
Yes, due to crowding out
question
Suppose that at the same time Congress and the president pursue an expansionary fiscal‚Äč policy, the Federal Reserve pursues an expansionary monetary policy. How might an expansionary monetary policy affect the extent of crowding out in the short‚Äč run?
answer
An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out
question
Which of the following are categories of federal government‚Äč expenditures?
answer
-Transfer payments -grants to state and local governments -interest on the national debt
question
The largest and‚Äč fastest-growing category of federal expenditures is
answer
transfer payments
question
The federal‚Äč government's day-to-day activities include running federal agencies like the Environmental Protection‚Äč Agency, the‚Äč FBI, the National Park‚Äč Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up
answer
less than 10 percent of federal government expenditures.
question
Increased government debt can lead to higher interest rates‚Äč and, as a‚Äč result, crowding out of private investment spending. In terms of borrowing‚Äč (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‚Äč economy?
answer
‚Äč-Debt-spending on research and development. -‚ÄčDebt-spending on highways and ports. -Debt-spending on education.
question
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 ‚Äč$134 million. Aggregate demand will___________ by $_________ million.
answer
- increase -27.8
question
What is fiscal‚Äč policy?
answer
Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
question
Who is responsible for fiscal‚Äč policy?
answer
The federal government controls fiscal policy.
question
Changes in taxes and spending that happen without actions by the government are called
answer
Automatic stabilizers
question
If the government cuts taxes in order to increase aggregate‚Äč demand, the action is called
answer
a discretionary fiscal policy.
question
When actual GDP is below potential GDP the budget deficit increases because‚Äč of:
answer
an increase in transfer payments and a decrease in tax revenues.
question
In the long‚Äč run, government tax policy can affect private investment which impacts the production function and factors of production. In other‚Äč 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‚Äč policies?
answer
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.
question
Suppose the government increases expenditures by ‚Äč$50 billion and the marginal propensity to consume is 0.90. By how will equilibrium GDP‚Äč change? The change in equilibrium GDP‚Äč is: $________ billion
answer
500
question
When is it considered‚Äč "good policy" for the government to run a budget‚Äč deficit?
answer
When borrowing is used for‚Äč long-lived capital goods.
question
When the economy is experiencing an expansion automatic stabilizers will‚Äč cause:
answer
transfer payments to decrease and tax revenues to increase.
question
The multiplier effect is only a consideration for increases in government purchases.
answer
False
question
____________ ______________are spending by the government on‚Äč goods, services, and factors of production.
answer
Government Purchases
question
_______________ _________________represent total government spending including‚Äč goods, services, grants to state and local‚Äč governments, and transfer payments.
answer
Government Expenditures
question
Since the‚Äč 1950s, total government‚Äč expenditures, as a percentage of‚Äč GDP, have ______________ and total government‚Äč purchases, as a percentage of‚Äč GDP, have ______________.
answer
Increased Decreased
question
The major cause of these trends is
answer
there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance.
question
If the‚Äč short-run aggregate supply curve‚Äč (SRAS) were a horizontal‚Äč line, what would be the impact on the size of the government purchases and tax multipliers?
answer
The impact of the multiplier would be larger if the SRAS curve is horizontal.
question
What is an expansionary fiscal‚Äč policy?
answer
Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.
question
What is a contractionary fiscal‚Äč policy?
answer
Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.
question
In‚Äč 2017, in proposing a‚Äč $1 trillion increase in government spending on‚Äč infrastructure, President Trump argued that the spending would increase total employment in the United States. In the short‚Äč run, increases in federal spending will increase real GDP and employment if
answer
the economy is producing at less than its potential output and has some cyclical unemployment.
question
In‚Äč 2017, in proposing a‚Äč $1 trillion increase in government spending on‚Äč infrastructure, President Trump argued that the spending would increase total employment in the United States. The federal government would not want to increase its‚Äč spending, even if the result were to increase real GDP and employment in the short‚Äč run, if
answer
it would lead to a greater federal deficit and an increase in the national debt.
question
In‚Äč 2017, in proposing a‚Äč $1 trillion increase in government spending on‚Äč infrastructure, President Trump argued that the spending would increase total employment in the United States. President Trump was assuming that in‚Äč 2017, the economy was
answer
able to create more jobs and expand without increasing the inflation rate.
question
As a result of crowding out in the short‚Äč run, the effect on real GDP of an increase in government spending is often
answer
less than the increase in government spending
question
Which can be changed more‚Äč quickly: monetary policy or fiscal‚Äč policy?
answer
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.
question
What is meant by crowding out?
answer
Crowding out is a decline in private expenditures as a result of increases in government purchases.
question
Which of the following best describes the difference between crowding out in the short run and in the long‚Äč run?
answer
In the short‚Äč 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‚Äč run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.
question
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‚Äč inflation?
answer
The legislative process experiences longer delays than monetary policy.