Exam 12: Fiscal Policy

A change in tax rates

Increasing the federal budget deficit will contribute to increasing the federal government debt.

A government tax rebate of $1,000 would ________ your disposable income by ________.

If government increases taxes by the same amount it increases government spending, there will be no effect on aggregate demand: the increase in government spending is offset by an equal decrease in consumption spending by households.

If the federal budget has an actual budget surplus of $7.5 billion, but a cyclically adjusted budget surplus of $5.0 billion, then the economy must be above potential real GDP.

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 ________.

To combat a recession with discretionary fiscal policy, the federal government should

Show the impact of tax reduction and simplification using the dynamic aggregate demand and aggregate supply model.Clearly show and identify the impact of the tax change.Assume that aggregate demand and short-run aggregate supply shift as they typically do in the dynamic model.Show what happens to the price level and real GDP because of the tax change.

The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was

The federal government debt equals

Borrowing to pay for long-lived capital expenditures makes sense as

Which of the following would not be considered an automatic stabilizer?

During 1975-1995, the federal government was

An increase in the tax wedge associated with a given economic activity will decrease the level of that activity.

Figure 12.10 Alt text for Figure 12.10: In figure 12.10, a graph comparing real GDP and price level. Long description for Figure 12.10: The x-axis is labelled, real GDP (trillions of 2007 dollars).The y-axis is labelled, price level (CPI).7 lines are shown; SRAS1, SRAS2, AD1, AD without policy, AD with policy, LRAS1, and LRAS2.Line SRAS1 begins in the bottom left corner and slopes up to the top right corner.Line SRAS2 follows the same slope as line SRAS1, but is plotted to the right.Line AD1 begins at the top left corner and slopes down to the end of the x-axis.Lines AD without policy, and AD with policy, follow the same slope as line AD1, but are plotted to the right.Line LRAS1 is perpendicular to the x-axis, and begins from the x-axis value 1.70.The line LRAS2 is perpendicular to the x-axis, and begins from the x-axis value 1.73, to the right of line LRAS1.Line LRAS1 intersects the lines AD1 and SRAS1 at point A (1.70, 125).Lines AD without policy, and SRAS2 intersect at point B (1.75, 130).Line LRAS2 intersects lines AD with policy, and SRAS2 at point C (1.73, 127). -Refer to Figure 12.10.In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B.Which of the following policies could the federal government use to move the economy to point C?

In Year 1 suppose the economy is at potential GDP and that the federal budget deficit equals $100 billion.In Year 2 the federal budget deficit rises to $150 billion, but the cyclically adjusted budget deficit falls to $75 billion.How can the actual budget deficit rise and the cyclically adjusted budget deficit fall?

The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the

The federal budget exhibited a surplus equal to 0.6 percent of GDP in 2008, but moved to a deficit of 0.4 percent of GDP in 2009.Some people want to blame the deficit solely on tax cuts, but others argued that the deficit grew because of the recession suffered in 2008-2009.Evaluate the validity of the second argument.

How could the existence of an employment insurance system or other transfer programs have reduced the severity of the Great Depression?

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