Exam 18: Fiscal Policy

Illustrate and explain the effects of tax reduction and simplification using the dynamic aggregate demand and supply model.To simplify the analysis,assume that aggregate demand is not affected by the tax cut.

Of the $840 billion American Recovery and Reinvestment Act stimulus package which was enacted in 2009,approximately ________ took the form of tax cuts and ________ took the form of increases in government expenditures.

An increase in the money supply is a discretionary fiscal policy which will increase aggregate demand.

Suppose that the federal budget is balanced when GDP is at potential GDP.If equilibrium GDP falls below potential

The Trump administration hopes that its program of infrastructure spending might expand employment by luring some prime-age workers back into the labor force.This would ________ the employment-population ratio,which would increase ________.

The nation of Hyperbole is in a recession,and the government decides to increase taxes and reduce government spending to reduce the growing deficit.This will ________ aggregate demand and will likely ________ real GDP and employment.

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

What is the difference between federal purchases and federal expenditures?

The Congressional Budget Office estimates the size of the tax multiplier to be ________ for a 1-year tax cut for higher-income people.

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 ________.

The federal budget was in deficit from 1931 to 1939,except in the year 1937.Given this fact,how do you explain E.Cary Brown's statement,"Fiscal policy,then,seems to have been an unsuccessful recovery device in the 'thirties-not because it did not work,but because it was not tried."

Identify each of the following as (i)part of an expansionary fiscal policy,(ii)part of a contractionary fiscal policy,or (iii)not part of fiscal policy. a.The personal income tax rate is lowered. b.Congress cuts spending on defense. c.College students are allowed to deduct tuition costs from their federal income taxes. d.The corporate income tax rate is lowered. e.The state of Nevada builds a new tollway in an attempt to expand employment and ease traffic in Las Vegas.

Does expansionary fiscal policy directly increase the money supply? Isn't it true that the president and Congress fight recessions by spending more money?

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

Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion.To move the economy back to potential GDP,Congress should

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 decrease in individual income taxes ________ disposable income,which ________ consumption spending.

A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect.

A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

If the economy is growing beyond potential real GDP,which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in