Exam 13: Fiscal Policy

-The figure above shows tax revenues and government expenditures in the economy of Meadowlake. Potential GDP is $15 trillion. If real GDP is $11 trillion, then the government has a_________

Using fiscal policy, to increase real GDP and employment the government could _________expenditure on goods and services or _________ taxes.

Once supply side effects are taken into account, tax cuts for labor income can change I. the supply of labor II. potential GDP.

A tax cut decreases government saving and can thereby crowd out investment.

When an economy is above full employment and the government has a budget deficit, that deficit_________

Taxes and government expenditures that, without need for additional government action, change in response to changes in the level of economic activity are examples of

A cyclical surplus is a

The sum of past budget deficits minus the sum of past budget surpluses refers to

The supply side effects of a change in taxes on labor income means that_________ in taxes on labor income shift the _________

The actual budget deficit is equal to the

-Economic data for a mythical economy in the years 2006 -2010 are summarized in the figure above. Assume that the spending formulas and tax schedules are identical for all years. When the economy is at less than full employment, the government has a

Suppose a country has been running a persistent government budget deficit. If the deficit is reduced, but remains positive,

Component Dollars (billion) Personal income taxes 500 Social security taxes 400 Corporate income taxes 150 Indirect taxes 75 Transfer payments 1,200 Expenditure on goods and services 225 Debt interest 75 -The table above has data for a country?s government budget. Government outlays for the economy equal__________ billion.

In 2011, the federal government of Happy Isle had tax revenues of $1 million, and spent $500,000 on transfer payments, $250,000 on goods and services and $300,000 on debt interest. In 2011, the government of Happy Isle had a __________.

Labor (millions of hours per year) Real GDP (millions of 2005 dollars) 200 6,800 240 7,680 280 8,400 320 8,960 360 9,360 The table above shows the aggregate production function in the economy of Prescottia. The people of Prescottia pay no taxes and are willing to work 248 million hours a year for a real wage rate of $8 an hour, and for each dollar increase in the real wage, they are willing to work 4 million additional hours per year. a) Draw the economyʹs aggregate production function. Wage rate (dollars per hour) Quantity of labor demanded (millions of hours per year) 24 200 20 240 16 280 12 320 b) Prescottiaʹs demand for labor schedule is in the table above. Draw Prescottiaʹs demand for labor and supply of labor curves. c) What are the economyʹs full-employment quantity of labor and real wage rate? What is the countryʹs potential GDP? d) Suppose that Prescottiaʹs government introduces a 25 percent income tax. Using your graph, what happens to the demand for labor? What happens to the supply of labor? Explain. e) After the tax is imposed, what happens to Prescottiaʹs full-employment quantity of labor? What happens to Prescottiaʹs potential GDP?

Fiscal policy

-In the above figure,

Generational accounting shows that the present value of the governmentʹs commitments to pay benefits are _________the present value of its taxes.

The difference between automatic fiscal policy and discretionary fiscal policy is that

How can discretionary fiscal policy be used to close a recessionary gap?