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Exam 27: Fiscal Policy

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Question 21

Multiple Choice

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Automatic stabilizers refer to

A) the money supply and interest rates that automatically increase or decrease along with the business cycle.
B) government spending and taxes that automatically increase or decrease along with the business cycle.
C) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives.
D) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

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Question 22

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Reducing the marginal tax rate on income will

A) reduce the tax wedge faced by workers and increase labor supplied.
B) raise the return to entrepreneurship and encourage the opening of new businesses.
C) increase the after-tax return on saving, and encourage saving.
D) All of the above are correct.

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Question 23

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Identify each of the following as (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. a. The personal income tax rate is lowered. b. Congress cuts spending on defense. c. College students are allowed to deduct tuition costs from their federal income taxes. d. The corporate income tax rate is lowered. e. The state of Nevada builds a new tollway in an attempt to expand employment and ease traffic in Las Vegas.

Table 27-6 -Refer to Table 27-6. 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.

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

Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP?

Figure 27-8 -Refer to Figure 27-8. 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 Congress and the president use to move the economy to point C?

Congress and the president carry out fiscal policy through changes in

The government purchases multiplier is defined as

If real equilibrium GDP is above potential GDP, expansionary fiscal policy should be pursued.

A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect.

Compare the effect on the price level and real GDP of a decrease in tax rates assuming a supply-side effect versus no supply-side effect. Compared to no supply-side effect, including a supply-side effect for the decrease in tax rates will cause the price level to increase ________ and real GDP to increase ________.

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

List the five categories of federal government expenditures.

In preparing their estimates of the stimulus package's effect on GDP, Obama administration economists estimated a government purchases multiplier of 1.57. Economist Robert Barro argues that during wartime, the government purchases multiplier would be ________ the administration's estimate, and economists Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo argued that when short-term interest rates are near zero, the multiplier would be ________ the administration's estimate.

Figure 27-9 -Refer to Figure 27-9. Given that the economy has moved from A to B in the graph above, which of the following would the appropriate fiscal policy to achieve potential GDP?

As the tax wedge associated with a given economic activity gets smaller, we would expect

The problem typically during a recession is not that there is too little money, but too little spending. If the problem was too little money, what would be its cause? If the problem was too little spending, what could be its cause?

Figure 27-3 -Refer to Figure 27-3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?