Chapter 14 Exam Prep Fiscal Policy - Principles of Macroeconomics -Complete Test Bank by Taylor. DOCX document preview.
Chapter 14
Fiscal Policy
Multiple Choice
1. In 2008, President Bush signed into law the Economic Stimulus Act that mainly included which of the following fiscal measures?
a. | Lower marginal income rates and lower estate taxes. |
b. | Higher marginal income rates and higher government spending. |
c. | Direct payments to individuals and families in order to raise consumption. |
d. | Lower government spending and higher interest rates. |
e. | None of these. |
OBJ: factual
SEC: 0. Fiscal Policy
TOP: Fiscal Policy in the 2000's
MSC: Bloom's: Knowledge | AACSB: Analytic
2. President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009, a $789 billion package of tax cuts and spending increases. The spending increases focused mostly on all of the following except
a. | assistance to state and local governments. |
b. | military spending. |
c. | infrastructure expenditure on highways. |
d. | rail and healthcare information systems. |
e. | money to local governments to prevent cuts in education. |
OBJ: conceptual
SEC: 0. Fiscal Policy
TOP: Fiscal Policy in the 2000's
MSC: Bloom's: Knowledge
/
3. The third substantial piece of fiscal policy legislation passed by the Bush administration, the Economic Stimulus Act of 2008, was the most expensive fiscal policy legislation of the decade.
Moderate
OBJ: factual
SEC: 0. Fiscal Policy
TOP: Fiscal Policy in the 2000's
MSC: Bloom's: Knowledge
4. The 2008 and 2009 major fiscal stimulus bills were motivated by the serious economic recession that hit the United States in 2008, and can be classified as "countercyclical."
Moderate
OBJ: conceptual | factual
SEC: 0. Fiscal Policy
TOP: Fiscal Policy in the 2000's
MSC: Bloom's: Knowledge | AACSB: Analytic
5. All four of the major fiscal interventions implemented in the 2000's decade have been blamed for worsening the long-term budget situation of the United States.
Basic
OBJ: factual
SEC: 0. Fiscal Policy
TOP: Fiscal Policy in the 2000's
MSC: Bloom's: Knowledge
Multiple Choice
6. The U.S. federal budget is
a. | document that analyzes the projected inflation target in the United States and the corresponding federal funds rate and real interest rate. |
b. | document that reflects the spending plans of each of the 50 states of the United States for a given year. |
c. | major summary document describing fiscal policy in the United States, including proposals for spending and taxes and the estimate of the corresponding budget deficit or surplus. |
d. | None of these |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Federal Budget
MSC: Bloom's: Knowledge
7. The major summary document describing U.S. federal fiscal policy is the
a. | Economic Report of the President. |
b. | U.S. Constitution. |
c. | Congressional Record. |
d. | federal budget. |
e. | Federal Reserve Bulletin. |
OBJ: factual
SEC: 1. The Government Budget
TOP: Federal Budget
MSC: Bloom's: Knowledge
/
8. The U.S. federal budget is a major summary document describing fiscal policy in the United States, including proposals for spending and taxes and the estimate of the corresponding budget deficit or surplus.
Basic
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Federal Budget
MSC: Bloom's: Knowledge
Multiple Choice
9. Most of the spending in the enacted budget is determined by
a. | the Council of Economic Advisers. |
b. | current presidential spending programs. |
c. | the Federal Reserve Board. |
d. | ongoing programs. |
e. | spending programs desired by Congress. |
OBJ: factual
SEC: 1. The Government Budget
TOP: Annual Budget
MSC: Bloom's: Knowledge
10. When tax revenues are equal to spending, there is
a. | budget deficit. |
b. | government absorption. |
c. | budget surplus. |
d. | balanced budget. |
e. | budget supplement. |
OBJ: factual
SEC: 1. The Government Budget
TOP: Balanced Budget
MSC: Bloom's: Knowledge | AACSB: Analytic
11. When tax revenues are less than spending, there is
a. | budget surplus. |
b. | budget deficit. |
c. | budget supplement. |
d. | government absorption. |
e. | balanced budget. |
OBJ: factual
SEC: 1. The Government Budget
TOP: Budget Deficit
MSC: Bloom's: Knowledge | AACSB: Analytic
12. Which of the following is ?
a. | Though not required by law, the government tends to run a balanced budget year after year. |
b. | If there is a budget deficit, the government must borrow to pay for the excess spending. |
c. | If there is a budget deficit, the government must ask the Fed to print money to finance excess spending. |
d. | By law the federal budget must balance. |
e. | If there is a budget deficit, the government must raise taxes. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Government Borrowing
MSC: Bloom's: Knowledge | AACSB: Analytic
13. Which of the following is ?
a. | The budget approved by Congress cannot be modified throughout the fiscal year. |
b. | The budget submitted by the president cannot be changed by Congress. |
c. | In a recession, the actual budget is likely to reflect a larger deficit than the proposed budget. |
d. | The budget submitted by the president can be changed by Congress and the Federal Reserve. |
e. | Proposed taxes and spending programs will always be the same as actual taxes and spending programs. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Government Budget
MSC: Bloom's: Knowledge | AACSB: Analytic
14. Which of the following statements is ?
a. | The budget is not affected by unanticipated economic events such as recessions. |
b. | The budget is not affected by unanticipated wars and natural disasters. |
c. | Changes in spending programs can be made throughout the fiscal year. |
d. | Congress seldom modifies the president's budget proposal. |
e. | Congress cannot modify the budget once it is enacted. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Enacted Budget
MSC: Bloom's: Knowledge | AACSB: Analytic
15. A supplemental is
a. | another term for transfer payments. |
b. | changes made to a budget in the current fiscal year. |
c. | the term used to describe congressional modification of a proposed budget. |
d. | additions made by the president to the proposed budget. |
e. | state and local budgets. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Supplemental
MSC: Bloom's: Knowledge
16. The whole budget cycle takes
a. | the same amount of time the economy takes to achieve long-run equilibrium. |
b. | one year. |
c. | more than four years. |
d. | more than three years. |
e. | more than two years. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Budget Cycle
MSC: Bloom's: Knowledge
17. Because of the length of the budget cycle, at any given time, the federal government is discussing
a. | one budget. |
b. | two budgets. |
c. | four budgets. |
d. | three budgets. |
e. | five budgets. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Budget Cycle
MSC: Bloom's: Knowledge
18. Which of the following is about the projected U.S. federal tax revenues and expenditures for 2017?
a. | A deficit is projected. |
b. | Tax revenues are projected to exceed expenditures by $500 billion. |
c. | The largest expenditure in the budget is defense. |
d. | All of the above |
e. | None of the above |
OBJ: factual
SEC: 1. The Government Budget
TOP: U.S. Deficits; Federal Budget
MSC: Bloom's: Knowledge
/
19. In the United States, the fiscal year runs from May to May.
Basic
OBJ: factual
SEC: 1. The Government Budget
TOP: Federal Budget
MSC: Bloom's: Knowledge
20. The president can change only a small part of the budget each year.
Moderate
OBJ: factual
SEC: 1. The Government Budget
TOP: Setting the Annual Budget
MSC: Bloom's: Knowledge | AACSB: Analytic
21. At any one time, there can be discussions in Congress about only one year's budget.
Moderate
OBJ: factual
SEC: 1. The Government Budget
TOP: Budget Cycle
MSC: Bloom's: Knowledge | AACSB: Analytic
22. By law, Congress and the president must approve the budget by the beginning of the fiscal year.
Moderate
OBJ: factual
SEC: 1. The Government Budget
TOP: Government Budget
MSC: Bloom's: Knowledge | AACSB: Analytic
23. The president and Congress typically settle on the budget before the beginning of the fiscal year.
Moderate
OBJ: factual
SEC: 1. The Government Budget
TOP: Government Budget
MSC: Bloom's: Knowledge | AACSB: Analytic
24. The U.S. federal budget for 2017 projects higher expenditures than tax revenues.
Basic
OBJ: factual
SEC: 1. The Government Budget
TOP: U.S. Deficits; Federal Budget
MSC: Bloom's: Knowledge
25. Social security is the biggest spending item in the U.S. 2017 federal budget, followed by defense.
Moderate
OBJ: factual
SEC: 1. The Government Budget
TOP: Federal Budget
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
26. The year 2001 was the ____ consecutive year the U.S. federal government had been running a budget ____.
a. | fourth; surplus |
b. | fourth; deficit |
c. | twenty-eighth; surplus |
d. | twenty-eighth; deficit |
e. | second; surplus |
OBJ: factual
SEC: 1. The Government Budget
TOP: Deficit
MSC: Bloom's: Knowledge
27. Since ____, the U.S. federal government has been running a budget deficit.
a. | 1970 |
b. | 1997 |
c. | 2002 |
d. | 2000 |
e. | 1969 |
OBJ: factual
SEC: 1. The Government Budget
TOP: Deficit
MSC: Bloom's: Knowledge | AACSB: Analytic
28. Which of the following types of taxes provide the least revenue for the federal government?
a. | Corporate taxes |
b. | Income taxes |
c. | Payroll taxes |
d. | Sales taxes |
e. | Property taxes |
OBJ: factual
SEC: 1. The Government Budget
TOP: Taxes
MSC: Bloom's: Knowledge
29. Which of the following types of taxes have been growing rapidly as a share of federal government revenues?
a. | Corporate taxes |
b. | Sales taxes |
c. | Payroll taxes |
d. | Income taxes |
e. | Property taxes |
OBJ: factual
SEC: 1. The Government Budget
TOP: Taxes
MSC: Bloom's: Knowledge
30. Which of the following types of taxes are not used by the federal government to raise revenue?
a. | Payroll taxes |
b. | Sales taxes |
c. | Property taxes |
d. | Income taxes |
e. | Corporate taxes |
OBJ: factual
SEC: 1. The Government Budget
TOP: Taxes
MSC: Bloom's: Knowledge
31. The symbol G used throughout the text stands for
a. | federal government expenditures. |
b. | purchases of goods and services by the federal government. |
c. | federal plus state and local government purchases of goods and services. |
d. | federal plus state and local government expenditures. |
e. | the difference between expenditures and tax revenues for the federal, state, and local governments. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Spending
MSC: Bloom's: Knowledge
32. Which of the following is the largest component of federal government expenditures?
a. | Transfer payments |
b. | Interest payments |
c. | Capital purchases |
d. | Defense purchases |
e. | Payroll for federal government employees |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Spending
MSC: Bloom's: Knowledge
33. For a hypothetical economy in 2010, the deficit was $300 billion, the national debt was $3,800 billion, and the average interest rate on the federal debt was 6.0 percent. The amount of interest payments made that year was
a. | $246 billion. |
b. | $270 billion. |
c. | $228 billion. |
d. | $18 billion. |
e. | $225 billion. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Interest Payments
MSC: Bloom's: Application | AACSB: Analytic
34. Early each year, the president of the United States issues an economic report, which contains the economic forecast for the year. This report is prepared by which of the following?
a. | By the Fed. |
b. | By the Department of the Treasury. |
c. | By the president's Council of Economic Advisers. |
d. | By the CIA. |
e. | None of these is correct. |
OBJ: factual
SEC: 1. The Government Budget
TOP: Economic Report of the President
MSC: Bloom's: Knowledge
35. About half of the U.S. budget consists of social security, Medicare, and Medicaid. Which of the following is not about these important expenditures?
a. | These are known as entitlement programs. |
b. | These programs are expected to remain relatively constant in coming years. |
c. | Social security and Medicare provide income and health care for the elderly, and Medicaid provides health care for people and families with very low incomes. |
d. | All of the above represent true facts. |
e. | None of the above are true facts. |
OBJ: factual
SEC: 1. The Government Budget
TOP: Federal Budget
MSC: Bloom's: Knowledge | AACSB: Analytic
/
36. Budget deficits have occurred every year for the past three decades.
Moderate
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Budget Deficit
MSC: Bloom's: Knowledge | AACSB: Analytic
37. Most government expenditures are for purchases of new goods and services.
Moderate
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Government Budget
MSC: Bloom's: Knowledge | AACSB: Analytic
38. There were federal budget surpluses between 1998 and 2001 because income grew very rapidly as the economy expanded during that time period.
Moderate
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Recent Budget Surplus
MSC: Bloom's: Knowledge | AACSB: Analytic
39. Because the government is the official issuer of money, it does not have to pay interest on its debt.
Basic
OBJ: conceptual
SEC: 1. The Government Budget
TOP: U.S. Deficits; Interest Rate
MSC: Bloom's: Knowledge
40. Social security, Medicare, and Medicaid are expected to grow very rapidly in the coming years.
Basic
OBJ: conceptual | factual
SEC: 1. The Government Budget
TOP: Federal Budget; Social Security
MSC: Bloom's: Knowledge
41. Interest rate payments are what the federal government pays every year on its debt. Total interest payments equal the interest rate multiplied by the amount of government debt outstanding.
Basic
OBJ: conceptual
SEC: 1. The Government Budget
TOP: U.S. Deficits; Interest Rate
MSC: Bloom's: Knowledge
42. Less than 20 percent of the U.S. budget currently consists of social security, Medicare, and Medicaid.
Moderate
OBJ: factual
SEC: 1. The Government Budget
TOP: Federal Budget
MSC: Bloom's: Knowledge | AACSB: Analytic
43. Early each year, the president of the United States issues an economic report, which contains the economic forecast for the year and is prepared by the CIA.
Basic
OBJ: factual
SEC: 1. The Government Budget
TOP: Economic Report of the President
MSC: Bloom's: Knowledge
44. President Bill Clinton's 1994 Economic Report presented the case for "shifting federal spending priorities from consumption to investment," a key fiscal policy principle of his administration.
Moderate
OBJ: factual
SEC: 1. The Government Budget
TOP: Economic Report of the President
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
45. Which of the following statements is ?
a. | There is no relationship between the federal deficit and the federal debt. |
b. | A federal deficit adds to the federal debt. |
c. | The change in the federal deficit each year equals the federal debt. |
d. | The federal debt is the same as the federal deficit. |
e. | The federal debt grew in the period when there was a federal budget surplus. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Federal Debt
MSC: Bloom's: Analysis | AACSB: Analytic
46. The total amount of outstanding loans owed by the federal government is known as
a. | the budget deficit. |
b. | the federal debt. |
c. | the current account deficit. |
d. | the yearly U.S. government deficit. |
e. | None of these |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Federal Debt
MSC: Bloom's: Knowledge
47. If a federal budget in which expenditures exceed revenue is enacted, the federal government will
a. | raise taxes. |
b. | raise taxes and cut spending. |
c. | cut spending. |
d. | sell off assets. |
e. | borrow money from the private sector. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Federal Deficit
MSC: Bloom's: Knowledge | AACSB: Analytic
48. Which of the following is about the relationship between the federal budget deficit and the federal debt?
a. | Whenever a country has a positive amount of federal debt, it must run a federal budget deficit in that year. |
b. | As discussed in the textbook, the federal budget deficit represents a real variable, while the federal debt represents a nominal variable. |
c. | As discussed in the textbook, the federal budget deficit represents a flow variable, while the federal debt represents a stock variable. |
d. | All of the above are true. |
e. | None of the above are true. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Federal Budget; Federal Debt; Stock and Flow Variables
MSC: Bloom's: Knowledge | AACSB: Analytic
49. Suppose a government has $4,000 billion of debt. This year, real GDP is $8,000 billion, the tax rate is 30 percent, and government spending is $2,000 billion. Which of the following is ?
a. | The deficit will decrease by $400 billion. |
b. | The debt will increase by $400 billion. |
c. | The deficit will increase by $400 billion. |
d. | The debt will decrease by $400 billion. |
e. | Both the deficit and the debt will increase by $400 billion. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Government Debt
MSC: Bloom's: Analysis | AACSB: Analytic
50. U.S. government debt in 2017 was approximately
a. | $15,000 billion. |
b. | $3,000 million. |
c. | $3,500 million. |
d. | $4,000 trillion. |
e. | $5,000 billion. |
OBJ: factual
SEC: 1. The Government Budget
TOP: Government Debt
MSC: Bloom's: Knowledge
51. In which of the following years was the debt to GDP ratio the lowest?
a. | 1992 |
b. | 1973 |
c. | 1985 |
d. | 1960 |
e. | 1950 |
OBJ: factual
SEC: 1. The Government Budget
TOP: Debt-to-GDP Ratio
MSC: Bloom's: Knowledge
52. In which of the following years was the debt to GDP ratio the highest?
a. | 1960 |
b. | 1950 |
c. | 1973 |
d. | 1992 |
e. | 1985 |
OBJ: factual
SEC: 1. The Government Budget
TOP: Debt-to-GDP Ratio
MSC: Bloom's: Knowledge
53. The debt to GDP ratio measures
a. | debt as a percentage of per capita GDP. |
b. | debt as a percentage of nominal GDP. |
c. | nominal GDP as a percentage of debt. |
d. | debt as a percentage of real GDP. |
e. | debt as a percentage of average GDP. |
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Government Debt
MSC: Bloom's: Knowledge
54. The debt to GDP ratio
a. | has been falling since 1998. |
b. | began to increase again in 2002. |
c. | has remained constant since 1998. |
d. | began to fall again in 2002. |
e. | has been increasing since 1998. |
OBJ: factual
SEC: 1. The Government Budget
TOP: Debt-to-GDP Ratio
MSC: Bloom's: Knowledge
/
55. The federal deficit is the total amount of outstanding loans that the U.S. federal government owes.
Moderate
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Federal Debt
MSC: Bloom's: Knowledge | AACSB: Analytic
56. In 1986 the debt to GDP ratio was the highest it had been since the end of World War II.
Moderate
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Debt-to-GDP Ratio
MSC: Bloom's: Knowledge
57. In 2010, the debt to GDP ratio was equal to about 150 percent.
Basic
OBJ: factual
SEC: 1. The Government Budget
TOP: Debt and Debt-to-GDP Ratio
MSC: Bloom's: Knowledge
58. The debt to GDP ratio grows every time there is a deficit.
Challenging
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Debt-to-GDP Ratio
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
59. State and local government expenditures are
a. | about two-thirds as much as the federal government's expenditures. |
b. | relatively small when compared to the federal government's expenditures. |
c. | about the same amount as the federal government's expenditures. |
d. | usually twice as much as the federal government's expenditures. |
e. | usually three times as much as the federal government's expenditures. |
OBJ: factual
SEC: 1. The Government Budget
TOP: State and Local Government Expenditures
MSC: Bloom's: Knowledge | AACSB: Analytic
60. The largest share of expenditures by state and local governments is for
a. | purchases of goods and services. |
b. | national defense. |
c. | transfer payments. |
d. | interest payments. |
e. | law enforcement. |
OBJ: factual
SEC: 1. The Government Budget
TOP: State and Local Government Expenditures
MSC: Bloom's: Knowledge
/
61. Most state and local government expenditures are for purchases of goods and services.
Basic
OBJ: factual
SEC: 1. The Government Budget
TOP: State and Local Government Budgets
MSC: Bloom's: Knowledge
62. State and local governments do not run deficits.
Basic
OBJ: factual
SEC: 1. The Government Budget
TOP: State and Local Government Budgets
MSC: Bloom's: Knowledge
Short Answer
63. Name two reasons why the actual budget may differ from the budget enacted at the start of the fiscal year.
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Proposed vs. Actual Budget
MSC: Bloom's: Analysis | AACSB: Analytic
64. Suppose a recession occurs unexpectedly in December one year. Explain why the actual budget will differ from the predicted budget.
OBJ: conceptual
SEC: 1. The Government Budget
TOP: Government Budget
MSC: Bloom's: Analysis | AACSB: Analytic
65. What are the major categories of taxes collected by the federal government? Which of these categories is the largest source of revenue? Which is the smallest source of revenue?
OBJ: factual
SEC: 1. The Government Budget
TOP: Taxes
MSC: Bloom's: Knowledge
66. What are the three classes of federal expenditures? Of these, what is the largest?
OBJ: factual
SEC: 1. The Government Budget
TOP: Federal Expenditures
MSC: Bloom's: Knowledge | AACSB: Analytic
67. What is the difference between the deficit and the debt?
OBJ: factual
SEC: 1. The Government Budget
TOP: Federal Debt
MSC: Bloom's: Knowledge | AACSB: Analytic
68. Explain the major trends in the debt to GDP ratio since 1950.
OBJ: factual
SEC: 1. The Government Budget
TOP: Debt-to-GDP Ratio
MSC: Bloom's: Analysis | AACSB: Analytic
69. Suppose, for a hypothetical country in 2017, the debt to GDP ratio was 120 percent and the deficit to GDP ratio was 10 percent. If it were not for interest payments on the debt, this country would have a balanced budget.
(A) | What was the average rate of interest this country paid on its debt? |
(B) | In 1994, Italy was reported to have the same debt and deficit ratios as this hypothetical country. The only difference was that Italy would have had a budget surplus if not for the interest payments on the debt. Was the average rate of interest that Italy paid more or less than the rate of interest calculated in part (A) above? |
(A) |
|
(B) | Since Italy would otherwise have been running a budget surplus, this means that the ratio of interest payments to the debt would have been higher. Hence the average rate of interest Italy paid on the debt in 1994 was higher than 8.3 percent. |
. The deficit to debt ratio is 
, which is the ratio of interest payments to the debt. Hence the average rate of interest paid on the debt was 8.3 percent.OBJ: conceptual
SEC: 1. The Government Budget
TOP: Interest Payments on the Debt
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
70. Which of the following is not an instrument of fiscal policy?
a. | Transfer payments |
b. | Government bonds |
c. | Income taxes |
d. | Sales taxes |
e. | Government purchases |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Instruments of Fiscal Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
71. Which of the following statements is ?
a. | In the short run, changes in fiscal policy mainly affect potential GDP. |
b. | Fiscal policy's initial impact on real GDP is permanent. |
c. | Fiscal policy does not have the potential to reduce the size of economic fluctuations. |
d. | Erratic changes in fiscal policy can increase economic fluctuations. |
e. | Fiscal policy cannot cause erratic fluctuations in real GDP. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Change in Government Purchases
MSC: Bloom's: Analysis | AACSB: Analytic
72. To reduce the size of economic fluctuations, the government could
a. | make fewer permanent changes in government spending. |
b. | change government purchases often to encourage a shift of the aggregate demand curve. |
c. | increase spending during a recession and decrease spending during an expansion. |
d. | keep government spending fixed to avoid shifting the aggregate demand curve. |
e. | continually increase government spending to shift the aggregate demand curve to the right. |
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Change in Government Spending
MSC: Bloom's: Analysis | AACSB: Analytic
73. An increase in government spending will
a. | increase real GDP in the short run and the long run. |
b. | increase real GDP in the short run. |
c. | increase the GDP to debt ratio. |
d. | have no effect on real GDP because taxes will increase. |
e. | increase real GDP in the short run and potential GDP in the long run. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Change in Government Spending
MSC: Bloom's: Analysis | AACSB: Analytic
74. Which of the following would cause the AD curve to shift to the right?
a. | An increase in sales taxes |
b. | An increase in potential GDP |
c. | A decrease in unemployment compensation |
d. | An increase in social security payments |
e. | A decrease in military purchases |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Change in Transfer Payments
MSC: Bloom's: Knowledge | AACSB: Analytic
75. Which of the following would cause the AD curve to shift to the left?
a. | An increase in tax rates |
b. | An increase in military purchases |
c. | An increase in unemployment compensation |
d. | A decrease in sales taxes |
e. | A decrease in potential GDP |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Change in Taxes
MSC: Bloom's: Analysis | AACSB: Analytic
76. A decrease in tax rates
a. | has no effect on the AD curve. |
b. | can lead to an increase in potential GDP. |
c. | causes the AD curve to shift left. |
d. | has no long-run effect on potential GDP. |
e. | has only a short-term effect on real GDP. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Change in Taxes
MSC: Bloom's: Analysis | AACSB: Analytic
77. A decrease in tax rates
a. | has no effect on the AD curve. |
b. | causes the AD curve to shift left. |
c. | causes the AD curve to shift right. |
d. | has only a short-term effect on real GDP. |
e. | usually leads to a reduction in potential GDP. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Change in Taxes
MSC: Bloom's: Analysis | AACSB: Analytic
/
78. Changes in government purchases always lead to fluctuations of real GDP from potential.
Moderate
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Fiscal Policy
MSC: Bloom's: Analysis | AACSB: Analytic
79. Increasing government purchases can contribute to higher inflation.
Moderate
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Fiscal Policy
MSC: Bloom's: Analysis | AACSB: Analytic
80. A change in taxes can affect potential GDP.
Moderate
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Change in Taxes
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
81. The aim of countercyclical fiscal policy is to
a. | shift the inflation adjustment line so that real GDP is equal to potential GDP. |
b. | reduce unemployment. |
c. | reduce inflation. |
d. | increase potential GDP. |
e. | shift the aggregate demand curve so that real GDP equals potential GDP. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Fiscal Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
82. To say that fiscal policy is countercyclical means that
a. | it is used only during a recession. |
b. | cyclical movements in the economy can be offset by fiscal policy. |
c. | it is not very effective as a policy tool. |
d. | government spending and real GDP are negatively correlated. |
e. | it is used only every other year. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Fiscal Policy
MSC: Bloom's: Analysis | AACSB: Analytic
83. Countercyclical fiscal policy is risky because
a. | it tends to increase the national debt. |
b. | real GDP is likely to be close to potential GDP by the time the policy takes effect. |
c. | it tends to have no effect on unemployment. |
d. | it tends to make recessions more severe. |
e. | it tends to result in higher inflation. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Fiscal Policy
MSC: Bloom's: Analysis | AACSB: Analytic
84. When using discretionary fiscal policy to counter a fluctuation in the economy, policymakers should
a. | make sure the policy is carried out in a timely manner. |
b. | use government purchases as an instrument only if the economy is in a recession. |
c. | use taxes as an instrument only if the economy is in a boom. |
d. | make sure that changes in government purchases will have an effect on real GDP. |
e. | make sure that transfer payments are held constant. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Fiscal Policy
MSC: Bloom's: Analysis | AACSB: Analytic
85. Suppose the economy is initially in equilibrium at point A in the figure below. A decrease in investment expenditures causes the AD curve to shift back to AD2. Under these circumstances, which of the following statements is ?
a. | If the countercyclical fiscal policy is made at the correct time, the AD curve will shift to AD4. |
b. | If there is no countercyclical fiscal policy, the AD curve will shift to AD4. |
c. | If there is no countercyclical fiscal policy, the AD curve will shift back to AD1. |
d. | If the countercyclical fiscal policy is timely enough, the AD curve will shift to AD3. |
e. | If there is no countercyclical fiscal policy, the IA line will shift up. |
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Fiscal Policy
MSC: Bloom's: Analysis | AACSB: Analytic
86. Suppose the economy is initially in equilibrium, and real and potential GDP are equal. Now, suppose export orders increase. Under these circumstances, which of the following statements is ?
a. | If the countercyclical fiscal policy response is made correctly, the new equilibrium will in the long run have a higher rate of inflation than if no response had been made. |
b. | If the countercyclical fiscal policy response is made correctly, the new equilibrium will in the long run have a lower rate of inflation than if no response had been made. |
c. | The inflation rate in the new long-run equilibrium will be the same, whether or not countercyclical fiscal policy is used. |
d. | If the countercyclical fiscal policy response is implemented too late, the new long-run equilibrium will have a higher rate of inflation than if no response had been made. |
e. | Countercyclical fiscal policy is unable to counter the effect of changes in export orders on real GDP. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Fiscal Policy
MSC: Bloom's: Analysis | AACSB: Analytic
87. Discretionary fiscal policy
a. | does not require changes in law. |
b. | does not require the involvement of Congress or the president. |
c. | is the same as a tax increase. |
d. | requires action on the part of the president and Congress. |
e. | needs the approval of the Federal Reserve Board. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Discretionary Fiscal Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
88. In practice, discretionary fiscal policy has
a. | been unsuccessful in offsetting recessions or booms. |
b. | been successful in offsetting booms but not recessions. |
c. | been successful in offsetting recessions and booms. |
d. | been successful in offsetting recessions but not booms. |
e. | always had a very adverse effect on the economy. |
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Discretionary Fiscal Policy
MSC: Bloom's: Knowledge
89. Tax cuts as part of a countercyclical policy have
a. | in most cases been able to offset the effects of a recession. |
b. | always been successful. |
c. | been able at best to speed up the recovery from recession. |
d. | rarely had any positive long-run effect. |
e. | never been used. |
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Fiscal Policy
MSC: Bloom's: Knowledge
90. Which of the following is not an automatic stabilizer?
a. | Social security payments |
b. | Unemployment compensation |
c. | Taxes |
d. | Welfare payments |
e. | Military expenditures |
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Automatic Stabilizers
MSC: Bloom's: Knowledge
91. Automatic stabilizers refer to
a. | the Fed's monetary policy rule. |
b. | the self-adjusting nature of a market economy. |
c. | the fact that Congress is called into session whenever there is a recession. |
d. | taxes and government spending that change automatically whenever the state of the economy changes. |
e. | the tendency for changes in inflation to return the economy to potential GDP. |
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Automatic Stabilizers
MSC: Bloom's: Knowledge
92. The fact that taxes and government spending change whenever the state of the economy changes results in
a. | more severe recessions and booms. |
b. | a more destabilized economy. |
c. | the need for more discretionary policy. |
d. | less severe recessions and booms. |
e. | the need for Federal Reserve intervention. |
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Automatic Stabilizers
MSC: Bloom's: Knowledge
93. To determine the size of the automatic stabilizer in 2011,
a. | calculate the difference between the taxes and spending proposed for 2011 and the actual taxes and spending in 2011. |
b. | compare the budget proposed by the president with the budget passed by Congress. |
c. | compare the size of the budget calculated by the president with the size of the budget calculated by the Congressional Budget Office (CBO). |
d. | read the language of the FY2011 Budget. |
e. | None of these |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Automatic Stabilizers
MSC: Bloom's: Analysis | AACSB: Analytic
94. A progressive tax system implies that
a. | the proportion of income paid to taxes rises as income increases and falls as income decreases. |
b. | the proportion of income paid to taxes falls as income increases and rises as income decreases. |
c. | the proportion of income paid to taxes rises as income increases and does not change as income decreases. |
d. | the proportion of income paid to taxes decreases as income increases and does not change as income decreases. |
e. | the proportion of income paid to taxes does not change as income increases and rises as income decreases. |
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Proportional Tax System
MSC: Bloom's: Knowledge
95. If taxes became more progressive, we would expect that whenever there was an economic fluctuation
a. | there would be no difference in how automatic changes in taxes affected spending. |
b. | automatic changes in taxes would become less stabilizing. |
c. | discretionary fiscal policy would become more effective. |
d. | automatic changes in taxes would become more stabilizing. |
e. | discretionary fiscal policy would become less effective. |
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Automatic Stabilizers
MSC: Bloom's: Analysis | AACSB: Analytic
/
96. In practice, discretionary changes in fiscal policy have offset booms and recessions.
Moderate
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Discretionary Fiscal Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
97. The stimulus package of 2009 is a good example of a countercyclical fiscal policy, a $789 billion package of government spending increases and tax cuts that aims to help the U.S. economy recover from a deep recession by increasing real GDP and moving the economy closer to potential output.
Moderate
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Fiscal Policy
MSC: Bloom's: Knowledge
98. The stimulus package of 2009 was widely accepted by economists as an appropriate response to the crisis at hand. Supporters of the plan included fiscally conservative economists Robert Barro and Eugene Fama.
Moderate
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Fiscal Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
99. The Economic Growth and Tax Reconciliation Act of 2001 is a recent example of discretionary fiscal policy.
Moderate
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Discretionary Fiscal Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
100. The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003 accelerated the tax cuts introduced in the 2001 plan, increased tax rates on capital gains and dividends, and introduced a child tax credit for parents.
Moderate
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Discretionary Fiscal Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
101. The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003 was implemented amidst concerns about the slow recovery of the economy following the 2001 recession.
Moderate
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Discretionary Fiscal Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
102. In practice, automatic fiscal policy has helped stabilize the economy.
Basic
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Automatic Fiscal Policy
MSC: Bloom's: Knowledge
103. Transfer payments are not affected by cyclical activity.
Moderate
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Transfer Payments
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
104. Which of the following Nobel laureate economists is against the use of discretionary fiscal policy?
a. | Milton Friedman. |
b. | James Tobin. |
c. | John Maynard Keynes. |
d. | Paul Krugman. |
e. | All of these favor discretionary fiscal policy. |
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: The Fiscal Policy Debate
MSC: Bloom's: Knowledge
105. A policy rule
a. | is another term for discretionary policy. |
b. | pertains only to fiscal policy. |
c. | is another term used to describe automatic fiscal policy. |
d. | applies only to monetary policy. |
e. | pertains to both automatic and discretionary policy. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Policy Rule
MSC: Bloom's: Knowledge | AACSB: Analytic
106. Which of the following is not an argument for the use of rules over discretion?
a. | Credibility |
b. | Budget balances are more predictable. |
c. | Recognition lags |
d. | Reliability |
e. | Automatic stabilizers may not be large enough. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
107. Critics of discretionary fiscal policy emphasize
a. | the unreliability of policy rules. |
b. | the monetary cost of discretionary fiscal policy. |
c. | the failure of automatic stabilizers in preventing a recession. |
d. | implementation lags. |
e. | the inflationary effects of discretionary fiscal policy. |
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Policy Rule
MSC: Bloom's: Knowledge | AACSB: Analytic
108. The recent use of discretionary fiscal policy was facilitated by
a. | the elimination of the balanced budget amendment. |
b. | the ineffectiveness of monetary policy. |
c. | changing beliefs among economists about the lags of monetary policy. |
d. | the use of automatic policy rules. |
e. | the prediction of high rates of unemployment that could otherwise occur in the future if government did nothing. |
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Discretionary Fiscal Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
/
109. Automatic fiscal policy is an example of a policy rule.
Basic
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Policy Rule
MSC: Bloom's: Knowledge
110. Policy rules tend to make the budget balance less predictable.
Basic
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Policy Rule
MSC: Bloom's: Knowledge
111. Policy rules tend to have the economy running a budget deficit during a recession and a budget surplus during an expansion.
Basic
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Policy Rule
MSC: Bloom's: Knowledge
Short Answer
112. In using countercyclical policy during a recession, the government faces a tradeoff between reducing unemployment now and reducing inflation in the long run. Please explain.
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Policy
MSC: Bloom's: Analysis | AACSB: Analytic
113. Why is discretionary fiscal policy considered risky or somewhat uncertain?
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Policy
MSC: Bloom's: Analysis | AACSB: Analytic
114. What are the arguments used by the proponents of discretionary fiscal policy?
OBJ: factual
SEC: 2. Countercyclical Fiscal Policy
TOP: Discretionary Fiscal Policy
MSC: Bloom's: Knowledge
115. Suppose that, because of a decline in investment expenditures in a hypothetical economy in the year 2011, real GDP follows the path ABCDE in the figure below. If a discretionary policy were used that was timely and not too little or too large, show how the path in the figure would change. Use the IA-AD curve analysis to show the consequence of this discretionary fiscal policy.
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Fiscal Policy
MSC: Bloom's: Application | AACSB: Analytic
116. Suppose that, because of a large increase in export orders in a hypothetical economy in the year 2011, real GDP follows the path ABCDE in the figure below. Suppose discretionary policy was used, but it was implemented too late. Show how the path in the figure below would change. Show what this looks like using the IA-AD curve analysis.
OBJ: conceptual
SEC: 2. Countercyclical Fiscal Policy
TOP: Countercyclical Fiscal Policy
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
117. The structural budget surplus is the size of the budget surplus when
a. | there is a spending balance. |
b. | the AD curve intersects the IA line. |
c. | the unemployment rate is zero. |
d. | the economy is in an expansion. |
e. | real and potential GDP are equal. |
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural Budget Surplus
MSC: Bloom's: Analysis | AACSB: Analytic
118. If real GDP equals B in the figure below, then
a. | None of these |
b. | there is a structural surplus. |
c. | there is a structural deficit. |
d. | the difference between government expenditures and tax revenue is equal to zero. |
e. | real GDP equals potential GDP. |
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural and Cyclical Surplus
MSC: Bloom's: Analysis | AACSB: Analytic
119. If real GDP equals C in the diagram below,
a. | distance df represents a budget surplus. |
b. | distance de represents a budget surplus. |
c. | there is a structural surplus. |
d. | there is a structural deficit. |
e. | distance de represents a cyclical surplus. |
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural Surplus
MSC: Bloom's: Analysis | AACSB: Analytic
120. There is an inverse relationship between the budget deficit and real GDP because
a. | of adjustments in inflation. |
b. | of the inverse relationship between interest payments on the debt and real GDP. |
c. | as real GDP increases, tax revenue increases and transfer payments decline. |
d. | as real GDP declines, taxes increase and transfer programs decline. |
e. | as real GDP increases, taxes decline and spending on transfer programs increases. |
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural and Cyclical Surplus
MSC: Bloom's: Analysis | AACSB: Analytic
Exhibit 26-1
121. According to Exhibit 26-1, when real GDP equals potential GDP,
a. | the cyclical budget is less than the structural budget. |
b. | there is a budget deficit. |
c. | the budget is balanced. |
d. | there is a budget surplus. |
e. | the cyclical budget is greater than the structural budget. |
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural and Cyclical Surplus
MSC: Bloom's: Application | AACSB: Analytic
122. If real GDP equals C in Exhibit 26-1,
a. | the structural surplus is equal to S2 S1. |
b. | the cyclical surplus is equal to S2. |
c. | the cyclical surplus is equal to S2 S1. |
d. | there is no structural surplus. |
e. | there is a balanced budget. |
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural and Cyclical Surplus
MSC: Bloom's: Application | AACSB: Analytic
123. Suppose, for a hypothetical economy, potential GDP equals $9,200 billion. If real GDP equals $9,400 billion, then according to the table below, the cyclical surplus equals
a. | $320 billion. |
b. | $40 billion. |
c. | $40 billion. |
d. | $20 billion. |
e. | $360 billion. |
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural and Cyclical Surplus
MSC: Bloom's: Application | AACSB: Analytic
/
124. For real and potential GDP to be equal, the budget surplus has to be zero.
Moderate
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural and Cyclical Surplus
MSC: Bloom's: Analysis | AACSB: Analytic
125. The size of the budget surplus depends on the state of the economy.
Basic
OBJ: factual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural and Cyclical Surplus
MSC: Bloom's: Knowledge
126. If real GDP is equal to potential GDP, the cyclical surplus is zero.
Moderate
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural Surplus
MSC: Bloom's: Analysis | AACSB: Analytic
127. Real GDP and the budget deficit are negatively related.
Moderate
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural Surplus
MSC: Bloom's: Analysis | AACSB: Analytic
Short Answer
128. What is the difference between a structural surplus and a cyclical surplus?
OBJ: factual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural and Cyclical Budget Deficit
MSC: Bloom's: Knowledge | AACSB: Analytic
129. Why is there an inverse relationship between real GDP and the budget deficit?
OBJ: factual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Cyclical Budget Deficit
MSC: Bloom's: Analysis | AACSB: Analytic
130. The table below shows the relationship between the deficit and real GDP. Draw a diagram depicting this relationship. Assume potential GDP is $6,900 billion.
(A) | What is the structural deficit? |
(B) | If real GDP is $7,050 billion, what is the cyclical deficit? |
(C) | If real GDP is $6,750 billion, what is the cyclical deficit? |
(D) | Show what will happen to the relationship between the deficit and real GDP if Medicare and federal prison incarceration costs increase without any corresponding increase in taxes or reduction in other programs. |
(A) | The structural deficit is $240 billion. |
(B) | If real GDP is $7,050 billion, the cyclical deficit is $200 $240 = $40 billion. |
(C) | If real GDP is equal to $6,750 billion, the cyclical deficit is $280 $240 = $40 billion. |
(D) | The line showing the relationship between real GDP and the deficit shifts up as depicted by the movement from D1 to D2 in the figure. |
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Structural and Cyclical Deficit
MSC: Bloom's: Application | AACSB: Analytic
131. Answer the questions below:
(A) | Suppose real GDP is less than potential GDP. Use a diagram with inflation on the vertical axis and percentage deviation of real GDP from potential GDP on the horizontal axis to show the short-run and long-run effects of a tax cut on the inflation rate and real GDP. |
(B) | Explain the tradeoff that has been made between unemployment and inflation. |
(C) | Suppose that, by the time the tax cut was in place, real GDP was again equal to potential GDP. Trace the short-run and long-run results on the same diagram. |
(A) | Assume we start at point A. If there is a tax cut, spending will increase and the aggregate demand curve will shift to the right. Depending on the size of the tax cut and the magnitude of the change in spending (as given by the multiplier effect), the aggregate demand curve may shift so the new level of real GDP is less than, equal to, or greater than potential in the short run. Suppose the aggregate demand curve shifts to AD2. The new short-run equilibrium point will be point B. In the long run, inflation will fall, and real GDP will return to potential GDP at point C. |
| |
(B) | By cutting taxes, the government reduced unemployment, as shown by the move from point A to point B. In the long run, inflation will be relatively higher, as given by the difference between point C and point D. |
(C) | If real GDP was again equal to potential GDP before the tax cut took effect, we would be starting from point D. Assume the aggregate demand curve again shifts to AD2. Real GDP will increase, and the economy will be at point E in the short run. In the long run, inflation will increase, and we will be at point C. The tax cut resulted in higher inflation and greater economic fluctuations than if there had been no tax cut. |
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Discretionary Fiscal Policy
MSC: Bloom's: Analysis | AACSB: Analytic
132. Suppose you have the following data on projected and actual figures for the U.S. budget for 2001 (in billions of dollars):
(A) | What was the projected budget deficit? What was the actual budget deficit? Why did this happen? |
(B) | If the government debt was $3,530 billion at the end of 2000, what was the debt at the end of 2001? |
(C) | If GDP was $9,500 billion in 2001, what was the debt to GDP ratio? How does this compare to 1992's debt to GDP ratio? |
(A) | The projected deficit in 2001 was $109 billion. The actual budget deficit in 2001 was $15 billion. The figures differ because tax revenues were greater than expected and expenditures were lower than projected. |
(B) | The debt in 2001 was $3,530 + $15 = $3,545 billion. |
(C) | The debt to GDP ratio in 2001 was |
. In 1992, the $9,500 debt to GDP ratio was close to 50 percent.OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: The Debt and the Deficit
MSC: Bloom's: Application | AACSB: Analytic
133. Supporters of policy rules argue that automatic stabilizers are sufficient to reduce the effects of recessions and expansions and have the added advantage of avoiding the lags associated with discretionary policy. Explain, making reference to an aggregate demand inflation diagram, how the automatic stabilizers can influence real GDP and reduce the size of economic fluctuations.
OBJ: factual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Automatic Stabilizers
MSC: Bloom's: Analysis | AACSB: Analytic
134. Suppose the economy is in a boom and spending is thought to be $75 billion above potential GDP. Suppose Congress decides to reduce military spending in an attempt to stabilize the economy.
(A) | Show the situation using the aggregate demand curve and the IA line. |
(B) | What happens to the inflation rate and the interest rate? |
(C) | According to the long-run growth model in Chapter 19 in your text, what effect would this policy have on economic growth? |
(A) | The diagram below illustrates a GDP gap of $75 billion. |
| |
(B) | If this policy reduces spending so that real and potential GDP are again equal, the rate of inflation and interest rates will be unaffected. However, if the policy causes people to reduce what they believe expected inflation will be, the real interest rate will also fall as the IA line shifts down. |
(C) | To the extent that this policy would lower the real rate of interest [see the discussion in part (B)], the rate of capital formation would increase, stimulating economic growth. |
OBJ: factual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Discretionary Fiscal Policy
MSC: Bloom's: Analysis | AACSB: Analytic
135. Suppose the budget deficit for a hypothetical economy fell from $107 billion in 2016 to $40 billion in 2017.
(A) | If the economy was undergoing an economic expansion for 2017, explain how this might account for at least part of the decrease in the budget deficit. |
(B) | Suppose real GDP equaled potential GDP in 2017 and was below potential GDP in 2016. Sketch a diagram that shows the responsiveness of the deficit to real GDP and also shows the structural deficit. |
(A) | On the revenue side, the strong economic expansion would lead to increased tax revenues. On the expenditure side, more jobs would be created during the expansion, reducing unemployment benefits and other transfer payments and thus reducing expenditures. |
(B) | In 2016, real GDP was below potential GDP, and the deficit was larger than the structural deficit. In 2017, real GDP equaled potential GDP, and therefore the structural and the actual budget deficit were equal. This is illustrated in the diagram below. |
|
OBJ: factual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Cyclical Deficit
MSC: Bloom's: Analysis | AACSB: Analytic
136. Consider the following hypothetical data (in billions of dollars):
Year | Budget Deficit | Government Debt as of Jan. 1 | GDP |
2014 | 121 | 5,500 | 8,300 |
2015 | 140 | 5,621 | 8,715 |
2016 | 9,761 | ||
2017 | 150 | 5,901 | 10,737 |
(A) | Fill in the missing values in the preceding table. |
(B) | What is the percentage change in the debt and GDP from 2014 to 2015 |
(C) | What is the percentage change in the debt and GDP from 2015 to 2016? |
(D) | Calculate the debt to GDP ratio for each year. How does this ratio change over time? Why? |
(A) | See table below. |
(B) | See table below. The debt increased by 2.2 percent between 2014 and 2015, and GDP increased by 5 percent. |
(C) | See table below. The debt increased by 2.5 percent between 2015 and 2016, and GDP increased by 12 percent. |
(D) | The debt to GDP ratio is shown in the last column of the table below. The ratio declines between 2014 and 2017. This is because GDP is growing at a faster rate than the debt. |
Year | Budget Deficit | Government Debt as of Jan. 1 | GDP |
2014 | 121 | 5,500 | 8,300 |
2015 | 140 | 5,621 | 8,715 |
2016 | 140 | 5,761 | 9,761 |
2017 | 150 | 5,901 | 10,737 |
OBJ: factual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Debt and Debt-to-GDP Ratio
MSC: Bloom's: Application | AACSB: Analytic
137. Suppose as a professional economist you are asked to take part in a debate about the wisdom of pursuing discretionary fiscal policy versus relying on automatic stabilizers. Outline some of the pros and cons for each side of the debate.
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Discretionary Fiscal Policy vs. Automatic Stabilizers
MSC: Bloom's: Analysis | AACSB: Analytic
138. Suppose the government surplus is currently .5 percent of real GDP and the structural surplus is 1.5 percent.
(A) | Is real GDP currently above or below potential GDP? Draw a diagram showing this situation. |
(B) | In your diagram, show the situation in which real GDP increases. What happens to the cyclical surplus? |
(A) | Real GDP is below potential GDP. This is illustrated in the diagram below. |
| |
(B) | When real GDP increases, the cyclical surplus (or deficit) will be eliminated, and the actual surplus will be equal to the structural surplus at potential GDP. |
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: The Structural Surplus
MSC: Bloom's: Application | AACSB: Analytic
139. Suppose that real GDP has been above potential GDP for some period of time. The government is considering a reduction in spending, and the Federal Reserve is trying to determine what is likely to happen to inflation. Trace out two possible scenarios that could occur as a result of decreased government spending. Be sure to comment on the long-run inflation level in each case.
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Discretionary Fiscal Policy
MSC: Bloom's: Analysis | AACSB: Analytic
140. Suppose that the economy is in a recession as a result of a fall in investment spending and real GDP is below potential GDP.
(A) | Illustrate this on an aggregate demand inflation diagram. |
(B) | When real GDP falls, what happens to tax revenue, government spending, and the budget balance? |
(C) | If a balanced budget amendment were in place, what would have to happen to government spending and/or taxes? Illustrate on the diagram. |
(D) | It is wise to allow the government to run a deficit during a recession and a surplus during an expansion. Please answer true or false and explain. |
(A) | We are now at point B. |
| |
(B) | Tax revenue falls because income is lower. Government spending rises because of a rise in transfer payments such as unemployment compensation, welfare payments, and social security. The deficit will rise. |
(C) | Spending would have to fall and/or taxes would have to rise. The AD curve would shift further to the left, and we would be at point C. |
(D) | This is true. Running a deficit during a recession is okay because it allows real GDP to remain higher than it would be with no deficit. The deficit can be balanced out by a surplus in boom times. |
OBJ: conceptual
SEC: 3. The Structural versus the Cyclical Surplus
TOP: Balanced Budget Amendment
MSC: Bloom's: Analysis | AACSB: Analytic