question

The Council of Economic Advisers (CEA) advises the President on

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economic matters, and provides recommendations for discretionary fiscal policy action.

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The government's fiscal policy options for ending severe demand-pull inflation include

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reducing government spending, increasing taxes, or both.

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For a person who wants to preserve the size of government, the fiscal options for ending severe demand-pull inflation would include

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an increase in taxes.

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For a person who thinks the public sector is too large, the fiscal options for ending severe demand-pull inflation would include

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a cut in government spending.

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The ratchet effect makes anti-inflationary policy _____.

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more difficult

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Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession. This is because when the economy enters a recession,

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net tax revenue falls and transfer payments rise. Balancing the budget would require lowering transfer payments and raising taxes.

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Built-in, or automatic, stabilizers work by changing ______ so that GDP changes are reduced.

answer

taxes and government payouts

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What type of tax system would have the most built-in stability?

answer

A progressive tax because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes.

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The standardized budget measures what the Federal deficit or surplus would be if the economy reached the ______ level of GDP

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full-employment

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If the standardized budget is balanced, the

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government is not engaging in either expansionary or contractionary policy.

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The problem of time lags in enacting and applying fiscal policy is that

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in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed.

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A political business cycle is the concept that

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politicians are more interested in reelection than in stabilizing the economy.

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Expectations of a near-term policy reversal weaken fiscal policy because

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consumers may hesitate to increase their spending because they believe that tax rates will rise again.

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The crowding-out effect is the

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reduction in investment spending caused by the increase in interest rates, arising from an increase in government spending.

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Consider the following statement: "Although fiscal policy clearly is useful in combating the extremes of severe recession and demand-pull inflation, it is impossible to use fiscal policy to fine-tune the economy to the full-employment, noninflationary level of real GDP and keep the economy there indefinitely." This statement recognizes that

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the impact of fiscal policy will affect the economy differently depending on the timing of the policy and the severity of the situation.

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What are the two ways to measure the public debt?

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Its absolute dollar size and as a percentage of GDP

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The distinction between the absolute and relative sizes of the public debt is important because

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the absolute size doesn't tell you about an economy's capacity to repay the debt.

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Refinancing the public debt means

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selling new bonds to retire maturing bonds.

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An internally held debt is one in which the

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bondholders live in the nation having the debt.

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Paying off an internally held debt would

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not burden the economy as a whole.

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Paying off an externally held debt

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may lower the dollar exchange rate.

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a. The total public debt is more relevant to an economy than the public debt as a percentage of GDP.

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false

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b. An internally held public debt is like a debt of the left hand owed to the right hand.

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true

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c. The Federal Reserve and Federal government agencies hold more than three-fourths of the public debt

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false

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d. The portion of the U.S. debt held by the public (and not by government entities) was larger as a percentage of GDP in 2009 than it was in 2000.

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true

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e. As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced industrial nations.

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false

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If the annual interest payments on the debt sharply increased as a percentage of the GDP,

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the government would have to use tax revenues or go deeper into debt.

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Refinancing of the public debt might drive up real interest rates because

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government borrowing to finance the debt increases demand for funds and competes with private borrowing.

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Refinancing of the public debt might cause

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higher interest rates that can lower investment and economic growth.

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If the public investment financed through borrowing complements private investment,

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private borrowers may be willing to pay higher interest rates associated with financing the public debt.

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Social Security and Medicare are "pay-as-you-go" plans. This means that

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most of the current revenues from the Social Security tax are paid to current Social Security retirees.

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Social Security and Medicare trust funds are

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assets held by these programs to help pay for future projected tax revenue shortfalls.

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Social Security and Medicare trust funds are projected to be depleted by

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2037 and 2017 respectively.

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The key long-run problem of both Social Security and Medicare is the

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aging, and the age distribution, of the U.S. population.

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During the recession of 2007?2009, the U.S. Federal government's tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?

answer

Yes

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a. To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin.

answer

Operational lag

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b. Distracted by a war that is going badly, inflation reaches 8 percent before politicians take notice.

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Recognition lag

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c. A sudden recession is recognized by politicians, but it takes many months of political deal making before a stimulus bill is finally approved.

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administrative lag

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d. To fight a recession, the president issues an executive order requiring Federal agencies to get rid of petty regulations that burden private businesses—but the Federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.

answer

operational lag

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In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the Federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Which of the following is true?

answer

There is a crowding-out effect of $20 billion.

Econ Chapter 31 – Flashcards

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