Chapter 11 Flashcards
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At an estimated cost of $831 billion, the largest stimulus measure in U.S history; enacted in February 2009
American Recovery and Reinvestment Act
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Structural features of government spending and taxation that reduce fluctuations in disposable income, and thus consumption, over the business cycle
automatic stabilizers
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A group of 18th- and 19th-century economists who believed that economic downturns corrected themselves through natural market forces; thus, they believed the economy was self-correcting and needed no government intervention
classical economists
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A decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; fiscal policy used to close an expansionary gap
contractionary fiscal policy
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The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability, and economic growth
discretionary fiscal policy
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Law that assigned to the federal government the responsibility for promoting full employment and price stability
Employment Act of 1946
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An increase in government purchases, decrease in net taxes, or some combination of the two aimed at increasing aggregate demand enough to reduce unemployment and return the economy to its potential output; fiscal policy used to close a recessionary gap
expansionary fiscal policy
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Income that individuals expect to receive on average over the long term
permanent income
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Economic fluctuations that occur when discretionary policy is manipulated for political gain
political business cycles
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- ________ are revenue and spending items in the federal budget that automatically change with the ups and downs of the economy so as to stabilize disposable income, consumption, and real GDP. a. Multipliers b. Discretionary fiscal policies c. Discretionary monetary policies d. Automatic stabilizers
automatic stabilizers
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- At any given price level, which of the following fiscal policies will decrease real GDP demanded, other things constant? a. Increase in fiscal spending on infrastructure b. Increase in net taxes c. Increase in transfer payments d. Increase in money supply
Increase in fiscal spending on infrastructure
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- President Obama’s fiscal stimulus plan that helped the U.S. economy to come out of recession in 2009 is an example of an automatic stabilizer.TrueFalse
FALSE
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- If the spending multiplier is 3 and the desired amount of increase in real GDP is $270 billion, then by how much would government spending have to increase? a. $270 billion b. $90 billion c. $30 billion d. $10 billion
90 billion
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5 If the marginal propensity to consume is 0.75 and the desired amount of increase in real GDP is $240 billion, then by how much would government spending have to increase? a. $240 billion b. $80 billion c. $60 billion d. $30 billion
60 billion
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6 The larger the marginal propensity to consume: a. the larger will be consumers’ savings. b. the more pronounced will be the impact of an expansionary fiscal policy. c. the smaller will be consumer’s consumption. d. the smaller will be the spending multiplier.
the more pronounced will be the impact of an expansionary fiscal policy.
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7 Which of the following correctly describes the simple tax multiplier? a. 1/(1-MPC) b. MPC/(1-MPC) c. -MPC/(1-MPC) d. MPS/MPC
-MPC/(1-MPC)xab
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8 If net taxes are decreased by $500 billion, and the marginal propensity to consume is 0.80, then which of the following correctly describes the increase in real GDP that will be generated by the decrease in net taxes? a. $2 trillion b. $1 trillion c. $500 billion d. $400 billion
$2 trillion
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9 Suppose that an expansionary gap of $500 billion exists in the economy, and the marginal propensity to consume is 0.8. Which of the following correctly describes a discretionary fiscal policy that will be just sufficient to close this expansionary gap? a. Increase government spending by $250 billion. b. Increase taxes by $125 billion. c. Decrease government spending by $250 billion. d. Decrease taxes by $125 billion.
Increase taxes by $125 billion.
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10 If the marginal propensity to consume (MPC) is 0.80, and if policy makers wish to increase real GDP by $200 million, then by how much would they have to change taxes? a. -$240 million b. -$200 million c. -$180 million d. -$50 million
-$50 million
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11 The multiplier effect on aggregate demand of a tax cut is less than the multiplier effect of an equal increase in government spending.TrueFalse
TRUE
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12 An expansionary fiscal policy is usually employed by the government to close an expansionary gap in the economy.TrueFalse
FALSE
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13 to close a recessionary gap, the government can: a. employ an expansionary fiscal policy that will shift the aggregate demand curve to the right. b. employ a contractionary fiscal policy that will shift the aggregate demand curve to the right. c. employ a contractionary fiscal policy that will shift the aggregate demand curve to the left. d. employ an expansionary fiscal policy that will shift the aggregate demand curve to the left.
employ an expansionary fiscal policy that will shift the aggregate demand curve to the right.
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14 If the economy is producing output at the potential level of GDP, then: a. an expansionary fiscal policy will increase real GDP in the long run. b. deficit spending by the federal government will increase prices in the long run. c. deficit spending will increase both, the real GDP and the prices in the long run. d. a tax increase will not lower the aggregate demand.
deficit spending by the federal government will increase prices in the long run.
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15 Discretionary fiscal policy in the form of an increase in government spending or a decrease in taxes can be used to close an expansionary gap.TrueFalse
FALSE
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16 If the economy is already producing its potential output, then, in the long run, any change in fiscal policy aimed at stimulating demand will simply increase the price level and have no impact on the output level in the economy.TrueFalse
TRUE
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17 ________ advocated laissez-faire, the belief that natural market forces, such as changes in prices, wages, and interest rates, would resolve expansionary or contractionary gaps. In contrast, ________ argued that prices and wages were not flexible enough for markets to self-adjust, and advocated discretionary fiscal policy. a. Keynes; classical economists b. Chairman Mao; Herbert Hoover c. Keynes; Ronald Reagan d. Classical economists; Keynes
Classical economists; Keynes
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18 If we follow the laissez-faire prescription and allow wages, prices, and interest rates to vary in the economy, then which of the market self-adjustments below would help close a contractionary gap in the absence of government policy intervention? a. Fall in product price b. Increase in product price c. Increase in interest rate d. Fall in wage rate
fall in product price
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19 Which of the following events strained belief in the economy’s ability to self-correct by way of price adjustment, leading to the development of discretionary fiscal policy in the 1930s? a. The American Civil War b. World War I c. The Gulf War d. The Great Depression
The Great Depression
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20 Which of the following correctly describes how an automatic stabilizer would function? a. During an economic expansion, incomes rise, and thus our progressive income tax claims a larger portion of income, slowing growth in disposable income. b. During an economic expansion, net taxes decline, since income grows faster than taxes, and because there is more income being made to support transfer payments to unemployed and disabled people. c. During a recession, progressive income tax claims a larger portion of income than during periods of economic growth, and government spending declines in order to balance the budget. d. During a recession, an increase in the flow of unemployment insurance taxes from the income stream into the unemployment insurance fund, reduces consumption and aggregate demand.
During an economic expansion, incomes rise, and thus our progressive income tax claims a larger portion of income, slowing growth in disposable income.
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21 Stagflation refers to a period of staggering economic growth combined with very low inflation rates.TrueFalse
FALSE
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22 If fiscal policy authorities believe that the natural rate of unemployment is lower than it actually is, and pursue fiscal policies to move economic output to what they believe full employment to be, then which of the following is most likely to occur? a. A recession b. Runaway inflation c. Increasing unemployment d. A depression
runaway inflation
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23 Political business cycles are economic fluctuations that occur when discretionary policy is manipulated for public interest.TrueFalse
FALSE
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24 Supply-side macroeconomic policy is based on the idea that an increase in the aggregate supply curve will result from a decrease in business taxes and deregulation, resulting in both an increase in real GDP and an increase in the overall price level.TrueFalse
FALSE
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25 If the federal budget deficit grows too large, then we can safely state that it will be difficult for government to justify implementing contractionary fiscal policies.TrueFalse
FALSE
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26 The American Recovery and Reinvestment Act, a $787 billion package of tax benefits and spending programs aimed at reducing aggregate demand in the U.S economy.TrueFalse
FALSE
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27 As per “cash-for-clunkers” program, car buyers who traded a drivable, registered, and insured clunker for a new one with better gas mileage were paid cash.TrueFalse
TRUE
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28 The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals is called using automatic stabilizers.TrueFalse
FALSE
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29 Which of the following would be a contractionary fiscal policy that would help close an expansionary gap? a. increase in government purchases b. decrease in taxes c. decrease in government purchases d. none of the above are contractionary fiscal policies
decrease in government purchases
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30 The steeper the short-run aggregate supply curve, the more impact a given shift of the aggregate demand curve has on real GDP and the more impact it has on the price level, so the smaller the spending multiplier.TrueFalse
FALSE
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31 To the extent that consumers base spending decisions on their permanent income, attempts to fine-tune fiscal policy with temporary tax changes are more effective.TrueFalse
FALSE
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32 Recessions are not identified for at least ________ months after it begins. a. 3 b. 4 c. 5 d. 6
6
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33 How much of all income tax is paid by the top 10 percent of earners? a. one-third b. two-thirds c. one-fourth d. one-half
two-thirds
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34 Which of the following was one the key factors sending the economy into the Great Recession? a. declining home prices and rising foreclosure rates b. declining interest rates and declining lending c. declining labor participation rates and rising retirement rate d. none of the above were reasons for the Great Recession
declining home prices and rising foreclosure rates
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35 The American Recovery and Reinvestment Act cost an estimated how much? a. $631 million b. $731 million c. $831 million d. $931 million
$831 million
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36 How much did employment fall by during the Great Recession? a. 8 million b. 9 million c. 10 million d. 11 million
8 million
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37 Political business cycles which are the results of economic fluctuations that occur when discretionary policy is manipulated for political gain.TrueFalse
TRUE
