Econ: Chapter 27 – Flashcards

Describe fiscal policy.

What are automatic stabilizers?

How can recessions be fought?

How can inflation be fought?

Describe the multiplier effect.

Describe the government purchases multiplier.

Describe the tax multiplier.

What is crowding out?

Describe budget deficit

Describe budget surplus

What is the cyclically adjusted budget deficit or surplus?

What is the federal government debt?

What is the tax wedge?

What is the largest source of federal government revenue?

What is the second largest source of federal government revenue?

1. Fiscal policy refers to a. changes in the money supply and interest rates to pursue macroeconomic policy goals, including price stability and high employment. b. changes in federal taxes and spending that are intended to achieve macroeconomic policy objectives. c. the manipulation of the price level, the level of real GDP, and total employment by the Federal Reserve. d. the use of economic policies to improve the functioning of the public sector.

2. Economists use the term fiscal policy to refer to changes in taxing and spending policies by a. only state and local governments. b. only the federal government. c. all levels of government, federal, state, and local. d. none of the above

3. The U.S. government increased spending for defense and homeland security after 2001 to fund the war on terrorism and the invasion of Iraq. These spending increases are considered a. strictly monetary policy. b. strictly fiscal policy. c. part of defense and homeland security policy, but not fiscal policy. d. both fiscal and monetary policy.

4. Changes in taxes and spending that happen without actions by the government are called a. discretionary fiscal policy changes. b. automatic stabilizers. c. transfer payments. d. autonomous fiscal expenditures.

5. Which of the following fiscal policy actions will increase real GDP in the short run? a. an increase in government expenditures b. an increase in the individual income tax c. an increase in the money supply d. an increase in the Social Security tax

6. When the government takes actions to change taxes and spending, the type of policy involved is called a. discretionary fiscal policy. b. automatic stabilizers. c. transfer payments. d. autonomous fiscal expenditures.

7. What is the relationship between government purchases and government expenditures? a. Government purchases include government expenditures. b. Government expenditures include government purchases. c. Government purchases and government expenditures are the same thing. d. Government purchases include all government spending, while government expenditures do not.

8. Which of the following are categories of federal government expenditures? a. transfer payments b. interest on the national debt c. grants to state and local governments d. all of the above

9. The largest and fastest growing category of federal expenditures is a. interest on the national debt. b. grants to state and local governments. c. transfer payments. d. defense spending.

10. Spending on most of the federal government's day-to-day activities - including running federal agencies like the Environmental Protection Agency, the FBI, the National Park Service, and the Immigration and Naturalization Service - make up a. about 85 percent of federal government expenditures. b. about 45 percent of federal government expenditures. c. less than 10 percent of federal government expenditures. d. less than 1 percent of federal government expenditures.

11. Which of the following is the main reason for the long-run funding problems of Social Security? a. The health of the typical American is declining. b. Too many workers are delaying their retirement until after age 65. c. The number of workers per retiree continues to decline. d. Increasing levels of immigration will eventually lead to larger numbers of retirees.

12. Which of the following are the largest sources of federal government revenues? a. corporate income taxes and sales taxes b. revenue from tariffs on imports and other fees c. individual income taxes and social insurance taxes d. property taxes and excise taxes

13. When the economy is in a recession, the government can a. reduce expenditures and leave taxes constant in order to stimulate aggregate demand. b. increase government purchases or decrease taxes in order to increase aggregate demand. c. decrease government purchases or increase taxes in order to decrease aggregate supply. d. change spending and taxation but not aggregate demand or aggregate supply

14. Which of the following will reduce the inflation rate? a. increasing the money supply b. increasing government purchases c. reducing government purchases or increasing taxes d. none of the above

15. The goal of expansionary fiscal policy is a. to decrease short-run aggregate supply. b. to decrease long-run aggregate supply. c. to increase aggregate demand. d. all of the above

16. An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________. a. expansionary; rise; rise b. expansionary; rise; fall c. contractionary; rise; fall d. contractionary; fall; fall

17. Which of the following statements is incorrect? a. Just as increasing or decreasing the money supply does not have any direct effect on government spending or taxes, increasing or decreasing government spending or taxes will not have any direct effect on the money supply. b. Fiscal policy and monetary policy may have the same goals, but they have different effects on the economy. c. The only difference between fiscal policy and monetary policy in fighting recessions and stimulating spending is where the money comes from. d. All of the above statements are correct.

18. By how much will equilibrium real GDP increase as a result of a $100 billion increase in government purchases? a. by more than $100 billion b. by less than $100 billion c. by exactly $100 billion d. None of the above; equilibrium real GDP will not change as a result of an increase in government purchases.

19. The multiplier effect consists of a. a series of autonomous expenditures that result from an initial increase in government expenditures. b. a series of autonomous expenditure increases that result from an initial increase in induced expenditures. c. a series of induced increases in consumption spending that result from an initial increase in autonomous expenditures. d. a change in government spending resulting from a change in equilibrium income.

20. How would you decompose the total effect of an increase in government purchases on the aggregate demand curve? (Note: the magnitudes of the shifts don't have to be the same.) a. The aggregate demand curve shifts once to the right and then back to the left. b. The aggregate demand curve shifts as a result of two distinct effects, twice to the right. c. The aggregate demand curve shifts as a result of two distinct effects, twice to the left. d. The aggregate demand curve does not shift, but there are two movements, one downward and one upward, along the curve.

21. The tax multiplier equals a. the change in taxes divided by the change in equilibrium GDP. b. the change in equilibrium GDP multiplied by the change in taxes. c. the change in equilibrium GDP divided by the change in taxes. d. the change in taxes multiplied by the resulting change in consumption.

22. We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier. a. smaller b. larger c. the same d. either smaller or larger, depending on the current tax rate

23. When the tax rate increases, the size of the multiplier effect ___________. a. increases b. decreases c. remains the same d. increases for small increases in the tax rate and decreases for large increases in the tax rate

24. Increases in government purchases and decreases in taxes have a __________ multiplier effect on equilibrium real GDP, and decreases in government purchases and increases in taxes have a __________ multiplier effect on equilibrium real GDP. a. positive; negative b. negative; positive c. positive; positive d. negative; negative

25. Getting the timing right can be more difficult with one of these policies. Which one? a. fiscal policy b. monetary policy c. environmental policy d. all of the above

26. Because they can quickly change policy in response to changing economic conditions, a. the Fed plays a larger role in stabilizing the economy than the president and Congress. b. the president and Congress play a larger role than the Fed in stabilizing the economy. c. the U.S. Treasury plays a larger role in stabilizing the economy than do the treasuries of other countries. d. the U.S. tax commission plays a larger role in stabilizing the economy than do either the Fed or the president and Congress

27. Crowding out refers to a. the problem arising from having to consult with a large number of people in order to get fiscal policy approved in time to help the economy. b. the decline in private expenditures that result from an increase in government purchases. c. the ever-decreasing amount of induced expenditures that eventually stop the government purchases multiplier. d. the reduction in government expenditures following an increase in consumption or investment expenditures.

28. According to the crowding out effect, if the federal government increases spending, the demand for money and the equilibrium interest rate will ___________, which will cause some consumption, investment, and net exports to ___________. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase

29. Higher interest rates in the United States will attract foreign investors. This will cause ______________ in the exchange rate between the dollar and other currencies, and ______________ in net exports. a. an increase; an increase b. an increase; a decrease c. a decrease; an increase d. a decrease; a decrease

30. What is the long-run effect of a permanent increase in government spending? a. a decline in investment, consumption, and net exports that is smaller than the increase in government purchases, therefore, aggregate demand increases b. a decline in investment, consumption, and net exports that is larger than the increase in government purchases, therefore, aggregate demand decreases c. a decline in investment, consumption, and net exports that exactly offsets the increase in government purchases, therefore, aggregate demand remains unchanged d. no change in investment, consumption, or net exports, therefore, no change in aggregate demand

31. Which of the following is true of any permanent increase in government purchases in the long run? a. Any permanent increase in government purchases can be accommodated by the economy in the long run so as to maintain a steady level of private expenditures. b. In the long run, any permanent increase in government purchases must come at the expense of private expenditures. c. In the long run, a permanent increase in government purchases does not affect private expenditures in any way. d. In the long run, any permanent increase in government purchases is usually accompanied by an increase in private expenditures of the same amount.

32. If the federal government's expenditures are greater than its revenue, there is a a. budget deficit. b. budget surplus. c. balanced budget. d. declining federal government debt.

33. Which of the following was a period of federal budget surpluses? a. from 1970 through 1997 b. from 1998 through 2001 c. from 2002 through 2006 d. None of the above; the federal government has experienced budget deficits every year since 1970.

34. Budget deficits automatically __________ during recessions and __________ during expansions. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

35. The cyclically adjusted budget deficit, a. is never negative. b. is measured as if the economy were at potential real GDP. c. moves up and down as the economy moves around potential real GDP. d. is always in balance.

36. To obtain a more accurate measure of the effects on the economy of the government's spending and tax policies, economists prefer to look at a. the actual budget deficit or surplus. b. the cyclically adjusted budget deficit or surplus. c. changes in the federal government debt. d. changes in the inflation rate.

37. Every time the federal government runs a budget deficit, the Treasury must a. buy securities from the Fed in order to increase its reserves. b. print money in order to finance the excess expenditures. c. borrow funds from savers by selling Treasury securities. d. supply funds in the federal funds market.

38. At the end of June 2007, the federal government debt was $8.9 trillion. More than half of this debt was held by a. households. b. business firms. c. agencies of the federal government. d. foreigners.

39. Which of the following statements about the federal debt is correct? a. The federal government is in danger of defaulting on its debt. b. Given the current interest payments as a percent of total federal expenditures, there is a great need for tax increases or significant cutbacks in other types of federal spending. c. If the debt becomes very large relative to the economy, then the government may have to raise taxes to high levels, or cut back on other types of spending to make the interest payments on the debt. d. Interest payments are currently about 60 percent of total federal expenditures.

40. If a tax cut has supply-side effects, then a. it will affect only aggregate demand. b. it will affect only aggregate supply. c. it will affect both aggregate demand and aggregate supply. d. it will definitely not increase the federal budget deficit.

41. Economists believe that the smaller the tax wedge for any economic activity, such as working, saving, investing, or starting a business, a. the lower the equilibrium interest rate. b. the greater the difference between the pretax and posttax return to those activities. c. the more of that economic activity that will occur. d. the greater the marginal tax rate.

42. The effect on the economy of tax reduction and simplification is a. a change in the costs and expectations of producers, as shown by an upward shift in the short-run aggregate supply curve. b. an increase in consumption and investment spending, and a rightward shift of the aggregate demand curve. c. an increase in the quantity of real GDP supplied at every price level, or a shift in the long-run aggregate supply curve. d. higher employment and real GDP but also a higher price level.

43. Tax simplification and reductions in tax rates will result in a. additional shifts to the right in LRAS leading to a higher price level and lower real GDP. b. additional shifts to the right in LRAS leading to a lower price level and lower real GDP. c. additional shifts to the right in LRAS leading to a lower price level and higher real GDP. d. additional shifts to the right in LRAS leading to a higher price level and higher real GDP.

1. Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment. A) interest rates; money supply B) taxes; the money supply C) taxes; expenditures D) taxes; interest rates

2. Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________. A) automatic stabilizers; discretionary fiscal policy B) discretionary fiscal policy; conscious fiscal policy C) automatic stabilizers; monetary policy D) discretionary fiscal policy; automatic stabilizers

3. Social Security A) has a greater number of workers per retiree today as compared to when it started. B) has not been successful in reducing poverty among elderly Americans. C) is a system whereby current retirees are paid from taxes collected from current workers. D) currently pays retirees benefits equal to what they paid into the system.

4. Expansionary fiscal policy will A) shift the short run aggregate supply curve to the left. B) not shift the aggregate demand curve. C) shift the aggregate demand curve to the left. D) shift the aggregate demand curve to the right.

5. To combat a recession with discretionary fiscal policy, Congress and the president will A) decrease taxes to increase consumer disposable income. B) raise taxes on interest and dividends, but not on personal income. C) lower interest rates and increase investment by increasing the money supply. D) decrease government spending to balance the budget.

7. Decreasing government spending ________ the price level and ________ equilibrium real GDP. A) decreases; decreases B) decreases; increases C) increases; increases D) increases; decreases

9. If policy makers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to A) increase interest rates. B) increase government spending. C) use expansionary fiscal policy. D) increase taxes

10. To combat inflation, Congress and the president should A) increase transfer payments. B) raise interest rates. C) decrease taxes. D) decrease government spending.

13. The problem causing most recessions is too little A) unemployment. B) taxes. C) money -- currency plus checking accounts. D) spending

14. If there is no crowding out, then an increase in government purchases of $200 billion will shift the aggregate demand curve to the right by A) less than $200 billion. B) $200 billion. C) None of the above are correct. This policy shifts the long run aggregate supply curve. D) more than $200 billion.

16. The tax multiplier A) is always less than one. B) is larger in absolute value as compared to the government spending multiplier. C) is a measure of how much taxes will fall when income is falling. D) is negative

17. An equal increase in government purchases and taxes will cause A) an increase in real GDP. B) a reduction in cyclically adjusted budget surplus. C) no change in real GDP. D) an increase in the budget surplus

18. Suppose real GDP is $13 trillion with potential real GDP $13.5 trillion and that the Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, the Congress and the president would need to decrease taxes by A) less than $500 billion. B) more than $500 billion. C) $500 billion. D) None of the above are correct. Congress should raise taxes in this case.

19. If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP. A) $7.25 trillion B) $250 billion C) $500 billion D) $1 trillion

. A one time tax rebate, which is not expected to be extended in future years, will: A) have no effect on consumption and aggregate demand. B) have a small positive effect on consumption and aggregate demand. C) increase aggregate supply and aggregate demand. D) will have a significant positive effect on consumption and aggregate demand, with aggregate demand growing by a multiple of the tax rebate.

21. Poorly timed discretionary policy can do more harm than good. Getting the timing right with fiscal policy is generally A) more difficult than with monetary policy. B) about the same difficulty as with monetary policy. C) less difficult than with monetary policy. D) far less difficult than with monetary policy.

22. A(n) ________ in private expenditures as a result of a(n) ________ in government purchases is called crowding out. A) decrease; increase B) increase; increase C) increase; decrease D) decrease; decrease

23. Crowding out, following an increase in government spending, results from (the exchange rate is the foreign exchange price of the domestic currency). A) higher interest rates and a lower exchange rate B) lower interest rates and a lower exchange rate. C) higher interest rates and a higher exchange rate D) lower interest rates and a higher exchange rate.

24. If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to A) be at potential GDP. B) There is insufficient information given here to draw a conclusion. C) be above potential GDP. D) be below potential GDP.

25. An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may: A) reduce investment in new capital. B) raise interest rates and reduce consumer expenditures on automobiles and new houses. C) make domestic businesses less competitive in international markets as the dollar appreciates in value. D) All of the above are correct

26. If the federal government's expenditures are less than its tax revenues, then A) the budget is balanced. B) a budget surplus results. C) a budget deficit results. D) No conclusion can be drawn here regarding the budget surplus or deficit without information regarding government purchases versus other outlays.

27. Government deficits tend to increase during A) periods of war and recession. B) recessions and booms. C) periods of increased financial uncertainty. D) periods of below or above average growth.

During recessions, government expenditure automatically A) rises, because of the progressive income tax system. B) falls, because of programs such as unemployment insurance and Medicaid. C) falls, because of the progressive income tax system. D) rises, because of programs such as unemployment insurance and Medicaid

. Suppose the government wants to maintain a balanced budget. To achieve this goal, when the economy falls into recession government would need to _________ taxes, which would cause aggregate demand to ________. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease

. The government cyclically adjusted budget for the country of Economia is in surplus in 2000, and in deficit in the following year, 2001. We can conclude: A) government must have cut tax rates or increased spending. B) government fiscal policy did not change between 2000 and 2001. C) government must have raised tax rates or cut spending. D) None of the abov

The federal government debt ________ when the federal government runs a deficit and ________ when the federal government runs a surplus. A) decreases; increases B) increases; increases C) decreases; decreases D) increases; decrease

Accumulating debt poses a problem for the U.S. federal government because A) it is currently in danger of defaulting on on the debt. B) the debt has to ultimately be paid off. C) a large debt to GDP ratio causes crowding out. D) building roads and bridges do not yield enough benefits to justify their cost.