ch 13, Econ Ch 13 Essay

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The government’s fiscal policy options for moving the economy out of a recession include
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increasing government spending, decreasing taxes, or both.
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For a person who wants to preserve the size of government, the fiscal options for ending a recession include
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an increase in government spending.
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For a person who thinks the public sector is too large, the fiscal options for ending recession would include
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a cut in taxes.
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Built-in, or automatic, stabilizers work by changing
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tax revenue and government payouts correct so that GDP changes are reduced.
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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 happens because
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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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In requesting a tax cut in the early 1960s, President Kennedy said, “It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise tax revenues in the long run is to cut tax rates now.” This statement recognizes that
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tax cuts increase production, GDP, and tax revenues.
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Budget deficits in 2002 were due to
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the recession and tax cuts
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Deficits increased substantially in 2008 because of
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fiscal stimulus after the financial collapse
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Total U.S. debt is the total amount of money debt held by the public is
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owed by the federal government to all security holders a portion of U.S. debt.
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Why is the debt as a percentage of GDP more relevant than the total debt?
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Debt as a percentage of GDP measures the economy’s ability to manage debt correct.
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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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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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As a percentage of GDP, the total U.S. public debt held by the public was larger in 2010 than it was in 1990.
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True
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As a percentage of GDP, the total U.S. public debt is the highest such debt among the world’s advanced 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 more tax revenues for interest 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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Social Security is a “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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The Social Security trust fund
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includes assets held by these programs to help pay for future projected tax revenue shortfalls.
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The long-run fiscal imbalance in the Social Security retirement system is the result of
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an aging population and declining worker-beneficiary ratio.
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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.
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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.
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taxes and government payouts
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What type of tax system would have the most built-in stability?
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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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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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The total public debt is more relevant to an economy than the public debt as a percentage of GDP
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F
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An internally held public debt is like a debt of the left hand owed to the right hand
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T
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The Federal Reserve and Federal government agencies hold more than three-fourths of the public debt
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F
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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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T
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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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F
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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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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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