Exam 27: Fiscal Policy

The federal budget exhibited a $128.7 billion surplus in 2001 but moved to a deficit of $157.8 billion in 2002.Some argued the deficit was opened up because of the Bush 2001 tax cuts,but others argued that the deficit grew because of the recession suffered in 2001.Evaluate the validity of the second argument.

The budget deficit increases during wars and recessions.

An increase in government spending will force an appreciation of the dollar,which causes net exports to fall.

During recessions,government expenditure automatically

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

Article Summary In a letter to Congress,Treasury Secretary Jacob Lew stated that the United States will run out of money by November 3 unless the $18.1 trillion debt limit was raised.Many Republicans want to use the debt limit as a negotiating point with the White House to get concessions on government spending,and the White House has stated that it will not negotiate with Republicans over the debt limit.Raising the debt limit allows the government to borrow in order to pay current debts,but does not approve new spending by the government.Without an agreement about raising the debt limit,the government could face a shut-down in mid-December,when government funding expires. -Refer to the Article Summary.When does the Treasury Department borrow? Why would the Treasury have to borrow more than it estimated,as was indicated by its letter to Congress to raise the debt ceiling? When would the Treasury repay what it borrowed,and who is it repaying?

Table 27-5 Year Potential Real GDP Real GDP Price Level 1 \ 10.2 trillion \ 10.2 trillion 100 2 10.8 trillion 10.6 trillion 103 -Refer to Table 27-5.The economy is in the state described by the table above.Draw the dynamic aggregate demand and aggregate supply diagram to illustrate the state of the economy in year 1 and year 2,assuming that no policy is pursued.Then illustrate and explain the appropriate fiscal policy to use in this situation.Assume that the policy results in the economy producing potential GDP.

Expansionary fiscal policy

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

Figure 27-5 -Refer to Figure 27-5.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,Congress and the president would most likely pursue

The federal government debt as a percentage of GDP did not rise

Table 27-1 Year Potential Real GDP Real GDP Price Level 2016 \ 18.0 trillion \ 18.0 trillion 150 2017 18.5 trillion 18.2 trillion 152 -Refer to Table 27-1.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2016 and in 2017 if Congress and the president do not use fiscal policy.If Congress and the president want to keep real GDP at its potential level in 2017,they should

Table 27-4 Year Potential Real GDP Real GDP Price Level 2016 \ 18.0 trillion \ 18.0 trillion 150 2017 18.5 trillion 18.8 trillion 154 -Refer to Table 27-4.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2016 and in 2017 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 2017,which of the following will be lower than if Congress and the president had taken no action?

Of the $840 billion American Recovery and Reinvestment Act stimulus package which was enacted in 2009,approximately one-third took the form of ________ and two-thirds took the form of increases in ________.

In an open economy,the government purchases multiplier will be

The Social Security and Medicare programs have been a failure in terms of reducing poverty among elderly U.S.citizens.

What is the difference between fiscal policy and monetary policy?

What is meant by crowding out? Explain the difference between crowding out in the short run and in the long run.

What is the government purchases multiplier if the tax rate is 0.2 and the marginal propensity to consume is 0.8? Assume the economy is closed.

The larger the marginal propensity to import,the larger the government purchases multiplier.