Question 1

The tax wedge is the difference between the

Accepted Answer

A) amount of taxes needed to balance the federal budget and the actual amount of taxes. 
B) amount of taxes needed to pay off the national debt and the actual amount of taxes. 
C) pretax and posttax returns to an economic activity. 
D) nominal and real interest rates. 
A) amount of taxes needed to balance the federal budget and the actual amount of taxes. 
B) amount of taxes needed to pay off the national debt and the actual amount of taxes. 
C) pretax and posttax returns to an economic activity. 
D) nominal and real interest rates. C

Question 2

Assuming a fixed amount of taxes and a closed economy,calculate the value of the government purchases multiplier,the tax multiplier,and the balanced budget multiplier if the marginal propensity to consume equals 0.75.

Accepted Answer

Government purchases multiplier = 1 / (1 - 0.75)= 4
Tax multiplier = -0.75 / (1 - 0.75)= −3
Balanced budget multiplier = 1

Question 3

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

Accepted Answer

A dollar change in government purchases has the opposite impact of a dollar change in taxes.For example,an increase in government purchases increases income,spending,and GDP in the economy.In contrast,an increase in taxes lowers income,spending,and GDP in the economy.As a result,the government purchases multiplier is positive,and the tax multiplier is negative.
A dollar change in government purchases will have a larger affect on GDP as compared to a dollar change in the tax multiplier.A change in government purchases affects overall spending directly.The first round GDP change in the multiplier process will be equal to this change in spending.In contrast,a change in taxes affects income first and then spending.For example,a tax cut will increase income,but not all of that income will be spent;some of it is saved.The fraction of income that is spent is the MPC times the income change.The first round GDP change in the multiplier process will be equal to this smaller change in spending.Hence,a decrease in taxes will have a smaller impact on equilibrium than would an increase in government purchases.

Question 4

What is expansionary fiscal policy? What is contractionary fiscal policy?

Accepted Answer

An expansionary fiscal policy is a decre

Question 5

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?

Accepted Answer

The rise in the actual budget deficit wi

Question 6

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

Accepted Answer

A) aggregate demand;government spending 
B) aggregate supply;taxes 
C) aggregate demand;taxes 
D) aggregate supply;government spending 
A) aggregate demand;government spending 
B) aggregate supply;taxes 
C) aggregate demand;taxes 
D) aggregate supply;government spending

Question 7

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.

Accepted Answer

@#IMG-DLM& The economy's initial equilibrium is at

Question 8

Which of the following is considered contractionary fiscal policy?

Accepted Answer

A) Congress increases the income tax rate. 
B) Congress increases defense spending. 
C) Legislation removes a college tuition deduction from federal income taxes. 
D) The New Jersey legislature cuts highway spending to balance its budget. 
A) Congress increases the income tax rate. 
B) Congress increases defense spending. 
C) Legislation removes a college tuition deduction from federal income taxes. 
D) The New Jersey legislature cuts highway spending to balance its budget.

Question 9

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

Accepted Answer

A) interest on the national debt,grants to state and local governments,and transfer payments. 
B) interest on the national debt,defense spending,and transfer payments. 
C) defense spending,budgets of federal agencies,and transfer payments. 
D) defense spending,Social Security,and Medicare. 
A) interest on the national debt,grants to state and local governments,and transfer payments. 
B) interest on the national debt,defense spending,and transfer payments. 
C) defense spending,budgets of federal agencies,and transfer payments. 
D) defense spending,Social Security,and Medicare.

Question 10

When President Obama took office in January 2009,he pledged to pursue an expansionary fiscal policy to try to pull the economy out of the recession.The next month,Congress passed the American Recovery and Reinvestment Act of 2009,an $840 billion package of spending increases and tax cuts that was

Accepted Answer

A) the largest fiscal policy action in U.S.history. 
B) second in size only to the fiscal policy action taken during the Great Depression. 
C) small in comparison to the actions taken during the recession of 1974-1975. 
D) roughly equal to the spending increases and tax cuts implemented during the recession of 1980-1982. 
A) the largest fiscal policy action in U.S.history. 
B) second in size only to the fiscal policy action taken during the Great Depression. 
C) small in comparison to the actions taken during the recession of 1974-1975. 
D) roughly equal to the spending increases and tax cuts implemented during the recession of 1980-1982.

Question 11

From an initial long-run equilibrium,if aggregate demand grows faster than long-run and short-run aggregate supply,then Congress and the president would most likely

Accepted Answer

A) decrease the required reserve ratio. 
B) decrease government spending. 
C) decrease oil prices. 
D) decrease tax rates. 
A) decrease the required reserve ratio. 
B) decrease government spending. 
C) decrease oil prices. 
D) decrease tax rates.

Question 12

Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant

Accepted Answer

A) decrease in oil prices. 
B) decrease in real GDP. 
C) increase in inflation. 
D) increase in labor productivity. 
A) decrease in oil prices. 
B) decrease in real GDP. 
C) increase in inflation. 
D) increase in labor productivity.

Question 13

List the five categories of federal government expenditures.

Accepted Answer

1.Defense spending
2.Transfer

Question 14

An increase in government spending may expedite recovery from a recession in the short run,but in the long run this policy may

Accepted Answer

A) reduce investment in new capital. 
B) make domestic businesses less competitive in international markets as the dollar appreciates in value. 
C) raise interest rates and reduce consumer expenditures on automobiles and new houses. 
D) All of the above are correct. 
A) reduce investment in new capital. 
B) make domestic businesses less competitive in international markets as the dollar appreciates in value. 
C) raise interest rates and reduce consumer expenditures on automobiles and new houses. 
D) All of the above are correct.

Question 15

If real GDP is $300 billion below potential GDP and the tax multiplier equals -1.5,then how much would the government need to change taxes to bring the economy to equilibrium at potential?

Accepted Answer

The government would need to c

Question 16

Figure 27-3  
-Decreasing government spending ________ the price level and ________ equilibrium real GDP.

Accepted Answer

A) decreases;increases 
B) increases;decreases 
C) increases;increases 
D) decreases;decreases 
A) decreases;increases 
B) increases;decreases 
C) increases;increases 
D) decreases;decreases

Question 17

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.

Accepted Answer

A) one-half;one-half 
B) three-fourths;one-fourth 
C) one-tenth;nine-tenths 
D) one-third;two-thirds 
A) one-half;one-half 
B) three-fourths;one-fourth 
C) one-tenth;nine-tenths 
D) one-third;two-thirds

Question 18

Figure 27-10  
-Refer to Figure 27-10.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?

Accepted Answer

A) increase income taxes 
B) increase government spending 
C) buy Treasury bills 
D) decrease the discount rate 
A) increase income taxes 
B) increase government spending 
C) buy Treasury bills 
D) decrease the discount rate

Question 19

Figure 27-1  
-Refer to Figure 27-1.Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued.Using the static AD-AS model in the figure above,this would be depicted as a movement from

Accepted Answer

A) D to C. 
B) A to E. 
C) C to D. 
D) C to B. 
E) E to A. 
A) D to C. 
B) A to E. 
C) C to D. 
D) C to B. 
E) E to A.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 27: Fiscal Policy

The tax wedge is the difference between the

Assuming a fixed amount of taxes and a closed economy,calculate the value of the government purchases multiplier,the tax multiplier,and the balanced budget multiplier if the marginal propensity to consume equals 0.75.

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

What is expansionary fiscal policy? What is contractionary fiscal policy?

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

Which of the following is considered contractionary fiscal policy?

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

When President Obama took office in January 2009,he pledged to pursue an expansionary fiscal policy to try to pull the economy out of the recession.The next month,Congress passed the American Recovery and Reinvestment Act of 2009,an $840 billion package of spending increases and tax cuts that was

From an initial long-run equilibrium,if aggregate demand grows faster than long-run and short-run aggregate supply,then Congress and the president would most likely

Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant

List the five categories of federal government expenditures.

An increase in government spending may expedite recovery from a recession in the short run,but in the long run this policy may

If real GDP is $300 billion below potential GDP and the tax multiplier equals -1.5,then how much would the government need to change taxes to bring the economy to equilibrium at potential?

Figure 27-3 -Decreasing government spending ________ the price level and ________ equilibrium real GDP.

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.

Figure 27-10 -Refer to Figure 27-10.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?

Figure 27-1 -Refer to Figure 27-1.Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued.Using the static AD-AS model in the figure above,this would be depicted as a movement from

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

Economics: Foundations and Models

Trade-Offs, comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, government Price Setting, and Taxes

Externalities, environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms,the Stock Market,and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology,production,and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, taxes, and the Distribution of Income

Gdp: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money,banks,and the Federal Reserve System

Monetary Policy

Inflation, unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

Filters

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

Figure 27-3 -Decreasing government spending the price level and equilibrium real GDP.

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.