Exam 16: Fiscal Policy

If the government purchases multiplier equals 2,and real GDP is $14 trillion with potential real GDP $14.5 trillion,then government purchases would need to increase by ________ to restore the economy to potential real GDP.

The federal government debt ________ when the federal government runs a deficit and ________ when the federal government runs a surplus.

Why will there be less crowding out of private spending by government spending the less sensitive consumption,investment,and net exports are to changes in interest rates?

How does expansionary monetary policy increase spending in the economy compared to how expansionary fiscal policy increases spending in the economy?

The federal budget deficit acts as an automatic stabilizer because

Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect.

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.

In the long run,most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending.

What is the government purchases multiplier if the tax rate is 0.1 and the marginal propensity to consume is 0.9? Assume the economy is closed.

To combat a recession with discretionary fiscal policy,Congress and the president should

Article Summary In November 2017,the House Ways and Means Committee announced a tax reform bill which includes hundreds of changes to the tax code.Overall,the tax plan represents a move in the direction of greater neutrality and global competitiveness.Following are eight of the most important provisions in the tax bill. 1.The corporate tax rate would be reduced to 20 percent. 2.Pass-through business income would be taxed at a maximum rate of 25 percent. 3.Some disincentives to investment would be rolled back. 4.The country would move to a territorial tax system. 5.Many itemized deductions would be eliminated. 6.The estate tax would be repealed. 7.The tax treatment of interest would change. 8.Tax expenditures would be curtailed. Source: Jared Walczak and Amir El-Sibaie,"Eight Important Changes in the Tax Cuts and Jobs Act," taxfoundation.org,November 2,2017. -Refer to the Article Summary.A reduction in the tax rate on pass-through business income to a maximum of 25 percent would ________ the return to entrepreneurship,and this would ________ aggregate supply.

The aggregate demand curve will shift to the left ________ the initial decrease in government purchases.

Figure 16-1 -Refer to Figure 16-1.Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

During recessions,government expenditure automatically

Table 16-6 -Refer to Table 16-6.Suppose the economy is in the state described by the table above.What problem will occur in the economy if no policy is pursued? What fiscal policy tools could be used to combat the problem? Draw a dynamic aggregate demand and aggregate supply diagram to illustrate the appropriate fiscal policy to use in this situation.

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.

In recent economic history,the U.S.federal budget was in surplus from

Table 16-3 -Refer to Table 16-3.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2018 and in 2019 if Congress and the president do not use fiscal policy.If Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2019,which of the following will be higher than if Congress and the president had taken no action?

Which of the following is considered contractionary fiscal policy?

Figure 16-10 -Refer to Figure 16-10.In the graph above,suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B.Which of the following policies could Congress and the president use to move the economy to point C?