Macroeconomics ch. 31

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Discretionary fiscal policy refers to:

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Expansionary fiscal policy is so named because it:

is designed to expand real GDP

If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by:

increasing government spending by $4 billion.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

Reductions in federal tax rates on personal and corporate income.

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should:

reduce tax rates and/or increase government spending.

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will:

shift the AD curve to the left.

Which of the following represents the most contractionary fiscal policy?

A $30 billion tax cut. A $30 billion increase in government spending. A $30 billion tax increase. A $30 billion decrease in government spending. (the answer)

A tax reduction of a specific amount will be more expansionary the:

larger is the economy’s MPC.

A major advantage of the built-in or automatic stabilizers is that they:

require no legislative action by Congress to be made effective.

Which of the following statements is correct?

Built-in stability only partially offsets fluctuations in economic activity.

The cyclically adjusted budget refers to:

the size of the federal government’s budgetary surplus or deficit when the economy is operating at full employment.

If the economy has a cyclically adjusted budget surplus, this means that:

tax revenues would exceed government expenditures if full employment were achieved.

The federal budget deficit is found by:

subtracting government tax revenues from government spending in a particular year.

Which of the following did not contribute directly to the Great Recession?

Bursting of the dot.com stock market bubble.

The American Recovery and Reinvestment Act of 2009:

implemented a $787 billion package of tax cuts and government expenditure increases.

Increases in the federal budget deficit from 2007 to 2009 were caused:

primarily by a combination of recession and expansionary fiscal policy.

The crowding-out effect of expansionary fiscal policy suggests that:

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes:

the crowding out effect

Suppose the federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government’s public debt would have:

increased by $20 bill

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