Exam 16: Fiscal Policy

Figure 16-1 -Refer to Figure 16-1.Suppose the economy is in a recession and expansionary fiscal policy is pursued.Using the static AD-AS model in the figure above,this would be depicted as a movement from

Calculate the government purchases multiplier if the marginal propensity to consume equals 0.8,the tax rate is 0.1,and the marginal propensity to import equals 0.2.

The multiplier effect is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures.

The three categories of federal government expenditures,in addition to government purchases,are

Suppose President Obama is successful in passing a $10 billion tax increase.Assume that taxes are fixed,the economy is closed,and the marginal propensity to consume is 0.8.What happens to equilibrium GDP?

Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a long-run macroeconomic equilibrium.For Year 2,graph aggregate demand,long-run aggregate supply,and short-run aggregate supply such that the condition of the economy will induce the president and the Congress to conduct contractionary fiscal policy.Briefly explain the condition of the economy and what the president and the Congress are attempting to do.

The government purchases multiplier is defined as

The government purchases multiplier equals the change in ________ divided by the change in ________.

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.

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Fiscal policy refers to changes in

Give an example of an automatic stabilizer.Explain how automatic stabilizers work in the case of recession.

Forecasts by the Congressional Budget Office show spending on Social Security,Medicare,and Medicaid rising from 9.9 percent of GDP in 2013 to ________ percent of GDP in 2087,and by 2087 the federal government will be spending,as a fraction of GDP,________ on these three programs as it currently spends on all its programs.

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.

Which of the following is an example of discretionary fiscal policy?

The tax multiplier equals the change in ________ divided by the change in ________.

An equal increase in government purchases and taxes will cause

Figure 16-11 -Refer to Figure 16-11.If government purchases increase by $100 billion and lead to an ultimate increase in aggregate demand as shown in the graph below,the difference in real GDP between point A and point B will be

If Congress passed a one-time tax cut in order to stimulate the economy in 2014,and tax rate levels returned to their pre-2014 level in 2015,how should this tax cut affect the economy?

Suppose that Congress allocates $5 billion to an "energy-efficient appliance rebate" program.It also raises taxes by $5 billion to keep the deficit from growing.If the marginal propensity to consume is 0.8,what is the effect on equilibrium GDP?