Exam 18: Fiscal Policy

The federal government debt equals

An appropriate fiscal policy response when aggregate demand is growing at a faster rate than aggregate supply is to decrease the money supply.

What is the "tax wedge"?

If Congress wanted to counteract the effects of a recession it could

Assume a country is required by law to balance the budget every year.Suppose aggregate demand falls,causing a recession and a budget deficit.To balance the budget,what would the government need to do with the level of government spending and taxes? How would these changes in government spending and taxes affect aggregate demand and the economy?

Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ________ through changing ________.

Included in government expenditures are government purchases and transfer payments.

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

Figure 18-1 -Refer to Figure 18-1.Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising.If contractionary policy is used to move the economy back to long run equilibrium,this would be depicted as a movement from ________ using the static AD-AS model in the figure above.

Reducing the marginal tax rate on income will

Figure 18-1 -Refer to Figure 18-1.Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued.Using the static AD-AS model in the figure above,this would be depicted as a movement from

If real GDP exceeded potential real GDP and inflation was increasing,which of the following would be an appropriate fiscal policy?

The federal budget exhibited a $128.7 billion surplus in 2001 but moved to a deficit of $157.8 billion in 2002.Some argued the deficit was opened up because of the Bush 2001 tax cuts,but others argued that the deficit grew because of the recession suffered in 2001.Evaluate the validity of the second argument.

Consider a tax cut which affects not only consumer disposable income,but also after-tax earnings from labor supplied to labor markets and from financial assets acquired through saving.In the long run we would expect this tax cut to

Explain why the tax multiplier is different from the government purchases multiplier,in both sign and relative magnitude.

Expansionary fiscal policy

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

If the economy is slipping into a recession,which of the following would be an appropriate fiscal policy?

A decrease in the marginal income tax rate is a fiscal policy which will increase aggregate demand.

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 ________.