question
Which of the following are categories of federal government expenditures?
answer
All of the above
(interest on the national debt, grants to state and local governments, transfer payments)
(interest on the national debt, grants to state and local governments, transfer payments)
question
The largest and fastest-growing category of federal expenditures is
answer
Transfer payments
question
The federal government's day-to-day activities include running federal agencies like the Environmental Protection Agency, the FBI, the National Park Service, and the Immigration and Customs Enforcement.
Spending on these types of activities make up
Spending on these types of activities make up
answer
less than 10 percent of federal government expenditures
question
Since World War II, the federal government's share of total government expenditures has been between
answer
two-thirds and three-quarters.
question
What is the difference between federal government purchases (spending) and federal government expenditures?
answer
government purchases are included in government expenditures
question
In 2009, Congress and the president enacted "cash for clunkers" legislation that paid people buying new cars up to $4,500 if they traded in an older, low gas-mileage car.
Source: Justin Lahart, Trade-In Program Tunes Up Economic Engine," Wall Street Journal, August 4, 2009.
Was this piece of legislation an example of fiscal policy?
Source: Justin Lahart, Trade-In Program Tunes Up Economic Engine," Wall Street Journal, August 4, 2009.
Was this piece of legislation an example of fiscal policy?
answer
Yes, because the primary goal of the spending program was to stimulate the national economy
question
Changes in taxes and spending that happen without actions by the government are called
answer
automatic stabilizers
question
If the government cuts taxes in order to increase aggregate demand, the action is called
answer
a discretionary fiscal policy
question
Which of the following statements is most accurate regarding fiscal policy and monetary policy?
answer
Fiscal policy includes changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and interest rates and is controlled by the Federal Reserve. Both policies are intended to achieve macroeconomic objectives
question
Briefly explain whether each of the following is an example of (1) a discretionary fiscal policy, (2) an automatic stabilizer, or (3) not a fiscal policy.
The federal government increases spending on rebuilding the New Jersey shore following a hurricane.
This is an example of
The federal government increases spending on rebuilding the New Jersey shore following a hurricane.
This is an example of
answer
not a fiscal policy
question
The Federal Reserve sells Treasury securities.
This is an example of
This is an example of
answer
not a fiscal policy
question
The total the federal government pays out for unemployment insurance decreases during an expansion.
This is an example of
This is an example of
answer
an automatic stabilizer
question
The revenue the federal government collects from the individual income tax declines during a recession.
This is an example of
This is an example of
answer
an automatic stabilizer
question
The federal government changes the required gasoline mileage for new cars.
This is an example of
This is an example of
answer
not a fiscal policy
question
Congress and the president enact a temporary cut in payroll taxes.
This is an example of
This is an example of
answer
a discretionary fiscal policy
question
What is the difference between federal purchases and federal expenditures?
answer
Federal purchases require that the government receives a good or service in return, whereas federal expenditures include transfer payments.
question
Are federal purchases higher today than they were in 1960?
answer
As a percentage of GDP, federal purchases have decreases since 1960
question
Are federal expenditures higher today than they were in 1960?
answer
As a percentage of GDP, federal expenditures have increased since 1960.
question
What is fiscal policy?
answer
Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives
question
Who is responsible for fiscal policy?
answer
The federal government controls fiscal policy
question
From the discussion in this chapter, which source of government revenue is likely to increase the most in the future?
answer
Individual income taxes.
question
According to a Congressional Budget Office report:
CBO projects that the population age 65 or older will increase by 87 percent between now and 2037, compared with an increase of just 12 percent over that period in the number of people ages 20 to 64....CBO...estimates that, unless changes are made to Social Security, spending for the program will rise from 5.0 percent of GDP today to 6.2 percent by 2037.
Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, June 2012, p. 65.
Who are the baby boomers?
CBO projects that the population age 65 or older will increase by 87 percent between now and 2037, compared with an increase of just 12 percent over that period in the number of people ages 20 to 64....CBO...estimates that, unless changes are made to Social Security, spending for the program will rise from 5.0 percent of GDP today to 6.2 percent by 2037.
Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, June 2012, p. 65.
Who are the baby boomers?
answer
People born between World War II and 1965
question
Why should the retirement of the baby boomers cause a large increase in the growth rate of spending by the federal government on Social Security?
answer
With the retirement of the baby boomers, there will be more individuals collecting Social Security than currently.
question
Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not increase?
answer
Yes, because fiscal policy and monetary policy are separate things.
question
Select the answer below that best corrects the following statement:
"An expansionary fiscal policy involves an increase in government purchases or an increase in taxes."
"An expansionary fiscal policy involves an increase in government purchases or an increase in taxes."
answer
an expansionary fiscal policy involves the increase of government purchases and/or a decrease in taxes in order to increase aggregate demand
question
Select the answer below that best corrects the following statement:
"A contractionary fiscal policy involves a decrease in government purchases or a decrease in taxes."
"A contractionary fiscal policy involves a decrease in government purchases or a decrease in taxes."
answer
a contractionary fiscal policy involves the decrease of government purchases and/or an increase in taxes in order to decrease aggregate demand
question
An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________.
answer
contractionary; fall; fall
question
A political commentator argues:
"Congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are unpopular."
Briefly explain whether you agree.
"Congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are unpopular."
Briefly explain whether you agree.
answer
Agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy.
question
The goal of expansionary fiscal policy is
answer
to increase aggregate demand
question
We saw in the chapter opener that during 2013, Congress and President Obama were unable to reach an agreement to avoid the sequester, which involved a series of automatic cuts in federal government purchases. In testifying before Congress, then Federal Reserve Chairman Ben Bernanke said that the sequester "could create a significant headwind for the economic recovery."
Source: Binyamin Appelbaum, 'Austerity Kills Government Jobs as Cuts to Budgets Loom," New York Times, February 26, 2013.
When Bernanke said "headwind," he meant that
Source: Binyamin Appelbaum, 'Austerity Kills Government Jobs as Cuts to Budgets Loom," New York Times, February 26, 2013.
When Bernanke said "headwind," he meant that
answer
the sequester could slow down the economic recovery.
question
The sequester could create a headwind for the economic recovery because government spending cuts resulting from the sequester could
answer
reduce aggregate demand.
question
The graph to the right shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined.
What actions can Congress and the president take to move the economy back to potential GDP?
What actions can Congress and the president take to move the economy back to potential GDP?
answer
increase government spending or decrease taxes
question
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 corporate income tax rate is increased. This is _________
b. Defense spending is increased. This is ___________
c. The Federal Reserve lowers the target for the federal funds rate. This is _________
d. Families are allowed to deduct all their expenses for daycare from their federal income taxes. This is ___________
e. The individual income tax rate is decreased. This is _________
(i) part of an expansionary fiscal policy,
(ii) part of a contractionary fiscal policy, or
(iii) not part of fiscal policy.
a. The corporate income tax rate is increased. This is _________
b. Defense spending is increased. This is ___________
c. The Federal Reserve lowers the target for the federal funds rate. This is _________
d. Families are allowed to deduct all their expenses for daycare from their federal income taxes. This is ___________
e. The individual income tax rate is decreased. This is _________
answer
a. part of a contractionary fiscal policy
b. not part of fiscal policy
c. not part of fiscal policy
d. not part of fiscal policy
e. part of an expansionary fiscal policy
b. not part of fiscal policy
c. not part of fiscal policy
d. not part of fiscal policy
e. part of an expansionary fiscal policy
question
If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes?
answer
In this case, Congress and the president should enact policies that increase government spending and decrease taxes
question
What changes should they make if they decide a contractionary fiscal policy is necessary?
answer
In this, Congress and the president should enact policies that decrease government spending and increase taxes
question
What is an expansionary fiscal policy?
answer
Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.
question
What is a contractionary fiscal policy?
answer
Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.
question
Use a dynamic aggregate demand and aggregate supply graph to illustrate the change in macroeconomic equilibrium from 2017 to 2018, assuming that the economy experiences deflation during 2018.
In order for deflation to take place in 2018, the economy
_________
also have to be experiencing a recession.
In order for deflation to take place in 2018, the economy
_________
also have to be experiencing a recession.
answer
does
question
An article in the Economist states that the value of potential GDP:
"is almost impossible to pin down in real time since the economy's equilibrium long-run stock of capital and labour are so difficult to estimate with precision...."
Source: "Remembering When the Future Kept Getting Bigger," Economist, May 24, 2012.
By "real time," the article means
"is almost impossible to pin down in real time since the economy's equilibrium long-run stock of capital and labour are so difficult to estimate with precision...."
Source: "Remembering When the Future Kept Getting Bigger," Economist, May 24, 2012.
By "real time," the article means
answer
at any point in actual time
question
Difficulty in estimating the "long-run stock of capital and labour" creates difficulty in estimating the value of potential GDP in real time because
answer
potential GDP is determined by the availability of resources, especially capital and labor.
question
The difficulty of estimating potential GDP matters for policymakers because ideally, equilibrium GDP should occur
answer
at potential GDP
question
The hypothetical information in the following table shows what the situation will be in 2017 if the federal government does not use fiscal policy:
Year
Potential GDP
Real GDP
Price Level
2016
$17.8 trillion
$17.8 trillion
113.7
2017
$18.2 trillion
$17.8 trillion
115.9
If Congress and the president want to keep real GDP at its potential level in 2017, they should use
__________________________
, which would mean
_____________________
If Congress and the president are successful in keeping real GDP at its potential level in 2017, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action:
Real GDP will be
____________________
Potential real GDP will be
________________
The inflation rate will be
________________
The unemployment rate will be
_______________
Year
Potential GDP
Real GDP
Price Level
2016
$17.8 trillion
$17.8 trillion
113.7
2017
$18.2 trillion
$17.8 trillion
115.9
If Congress and the president want to keep real GDP at its potential level in 2017, they should use
__________________________
, which would mean
_____________________
If Congress and the president are successful in keeping real GDP at its potential level in 2017, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action:
Real GDP will be
____________________
Potential real GDP will be
________________
The inflation rate will be
________________
The unemployment rate will be
_______________
answer
an expansionary fiscal policy
increasing government spending or cutting taxes
higher
the same
higher
lower
increasing government spending or cutting taxes
higher
the same
higher
lower
question
Use the graph to the right to answer the following questions:
a. If the government does not take any policy actions, then, in 2017, the value of real GDP will be $_______ trillion and the value of the price level will be __________.
b. What actions can the government take to bring real GDP to its potential level in 2017?
In order to bring real GDP to its potential level in 2017, the government can engage in _____________ fiscal policy by either
___________ government spending or
_________ taxes.
c. If the government takes no policy actions, the inflation rate in 2017 will be _____%. (Enter your response rounded to one decimal place.)
If the government uses fiscal policy to keep real GDP at its potential level, the inflation rate in 2017 will be _____%.
a. If the government does not take any policy actions, then, in 2017, the value of real GDP will be $_______ trillion and the value of the price level will be __________.
b. What actions can the government take to bring real GDP to its potential level in 2017?
In order to bring real GDP to its potential level in 2017, the government can engage in _____________ fiscal policy by either
___________ government spending or
_________ taxes.
c. If the government takes no policy actions, the inflation rate in 2017 will be _____%. (Enter your response rounded to one decimal place.)
If the government uses fiscal policy to keep real GDP at its potential level, the inflation rate in 2017 will be _____%.
answer
a. 18.0; 117
b. expansionary; increasing; decreasing
c. 2.6; 4.4
b. expansionary; increasing; decreasing
c. 2.6; 4.4
question
Over time, potential GDP ________, which is shown by the ________ curve shifting to the right.
answer
increases; long-run aggregate supply
question
Which of the following is not a correct comparison between an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
answer
All of the above are correct statements about the two models.
(If the economy is below full employment, expansionary fiscal policy will cause an increase in the price level in both models;
In the dynamic model, expansionary policy would be used when demand does not grow sufficiently; in the basic model, expansionary policy would be used when demand falls;
The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static.)
(If the economy is below full employment, expansionary fiscal policy will cause an increase in the price level in both models;
In the dynamic model, expansionary policy would be used when demand does not grow sufficiently; in the basic model, expansionary policy would be used when demand falls;
The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static.)
question
Which of the following is not a correct comparison between a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
answer
None of the above are correct statements about the two models
question
Suppose that real GDP is currently $13.4 trillion and potential real GDP is $14.0 trillion, or a gap of $600 billion. The government purchases multiplier . is 5.0, and the tax multiplier is 4.0
Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP?
Government spending will need to be increased by $_______ billion.
Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP?
Taxes will need to be cut by $_______ billion
Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP?
Government spending will need to be increased by $_______ billion.
Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP?
Taxes will need to be cut by $_______ billion
answer
120 billion
150 billion
150 billion
question
Suppose that real GDP is currently $13.7 trillion and potential real GDP is $14.0 trillion, or a gap of $300 billion. The government purchases multiplier is 3.3, and the tax multiplier is 2.3
Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP?
Government spending will need to be increased by $______ billion. (Enter your response rounded to the nearest whole number.)
Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP?
Taxes will need to be cut by $______ billion.
Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP?
Government spending will need to be increased by $______ billion. (Enter your response rounded to the nearest whole number.)
Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP?
Taxes will need to be cut by $______ billion.
answer
91
130
130
question
Suppose that real GDP is currently $13.8 trillion and potential real GDP is $14.0 trillion, or a gap of $200 billion. The government purchases multiplier is 10.0, and the tax multiplier is 9.0
Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP?
Government spending will need to be increased by $_________ billion. (Enter your response rounded to the nearest whole number.)
Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP?
Taxes will need to be cut by $_______ billion
Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP?
Government spending will need to be increased by $_________ billion. (Enter your response rounded to the nearest whole number.)
Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP?
Taxes will need to be cut by $_______ billion
answer
20
22
22
question
The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.
answer
True
question
Expansionary fiscal policy has a ________ multiplier effect on equilibrium real GDP, and contractionary fiscal policy has a ________ multiplier effect on equilibrium real GDP.
answer
positive; negative
question
The higher the tax rate, the larger the multiplier effect.
answer
False
question
Why does a $1 increase in government purchases lead to more than a $1 increase in income and spending?
answer
Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending
question
The Caldecott tunnel in northern California and similar construction projects elsewhere in the country would be expected to help the economy in the short run, because
answer
the use of discretionary fiscal policy would create a multiplied increase in real GDP and employment.
question
A spokesperson for the California state agency in charge of the project mentioned that the Caldecott tunnel project would have a "ripple effect" on employment. The ripple effect meant that
answer
the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers.
question
If the short-run aggregate supply curve (SRAS) were a horizontal line, what would be the impact on the size of the government purchases and tax multipliers?
answer
the impact of the multiplier would be larger if the SRAS curve is horizontal
question
As the tax rate increases,
answer
the multiplier effect decreases
question
In The General Theory of Employment, Interest, and Money, John Maynard Keynes wrote this:
"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise...to dig the notes up again... there need be no more unemployment and, with the help of the repercussions, the real income of the community...would probably become a good deal greater than it is."
In this statement, Keynes is discussing the important macroeconomic effect called the
____________
effect.
"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise...to dig the notes up again... there need be no more unemployment and, with the help of the repercussions, the real income of the community...would probably become a good deal greater than it is."
In this statement, Keynes is discussing the important macroeconomic effect called the
____________
effect.
answer
multiplier
question
By repercussions, Keynes means that an initial increase in autonomous expenditures will
answer
change production by an amount greater than the initial increase in autonomous expenditures.
question
Keynes appears unconcerned if government spending is wasteful because
answer
it will still lead to an increase in production and employment
question
A Federal Reserve publication discusses an estimate of the tax multiplier that gives it a value of 1.2 after one year and 2.8 after two years.
Source: Sylvain Leduc, "Fighting Downturns with Fiscal Policy," Federal Reserve Bank of San Francisco Economic Letter, June 19, 2009.
Why might the tax multiplier have a larger value after two years than after one year?
Source: Sylvain Leduc, "Fighting Downturns with Fiscal Policy," Federal Reserve Bank of San Francisco Economic Letter, June 19, 2009.
Why might the tax multiplier have a larger value after two years than after one year?
answer
Consumers are more likely to perceive the tax change as permanent and change their spending choices.
question
Consider the following statement:
"Real GDP is currently $17.7 trillion, and potential real GDP is $17.4 trillion. If Congress and the president would decrease government purchases by $300 billion or increase taxes by $300 billion, the economy could be brought to equilibrium at potential GDP."
If government purchases were to decrease by $300 billion or if taxes were increased by $300 billion, the equilibrium level of real GDP would decrease by
"Real GDP is currently $17.7 trillion, and potential real GDP is $17.4 trillion. If Congress and the president would decrease government purchases by $300 billion or increase taxes by $300 billion, the economy could be brought to equilibrium at potential GDP."
If government purchases were to decrease by $300 billion or if taxes were increased by $300 billion, the equilibrium level of real GDP would decrease by
answer
more than $300 billion.
question
Therefore, the statement above is
__________.
__________.
answer
incorrect
question
Which of the following accurately defines the government purchases multiplier and the tax multiplier?
answer
The government purchases multiplier = Δ in equilibrium real GDP/ Δ in government purchases
and the Tax multiplier = Δ in equilibrium real GDP/ Δ in taxes
and the Tax multiplier = Δ in equilibrium real GDP/ Δ in taxes
question
Suppose that at the same time Congress and the president pursue an expansionary fiscal policy, the Federal Reserve pursues an expansionary monetary policy.
How might an expansionary monetary policy affect the extent of crowding out in the short run?
How might an expansionary monetary policy affect the extent of crowding out in the short run?
answer
An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out.
question
Some economists argue that because increases in government spending crowd out private spending, increased government spending will reduce the long-run growth rate of real GDP.
a. This is most likely to happen if the private spending being crowded out is _______________
b. In terms of its effect on the long-run growth rate of real GDP, it is likely to matter more if the additional government spending involves
a. This is most likely to happen if the private spending being crowded out is _______________
b. In terms of its effect on the long-run growth rate of real GDP, it is likely to matter more if the additional government spending involves
answer
a. investment spending
b. increased spending on highways and bridges
b. increased spending on highways and bridges
question
Which can be changed more quickly: monetary policy or fiscal policy?
answer
Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.
question
Crowding out refers to
answer
the decline in private expenditures that result from an increase in government purchases
question
The recessions accompanied by a financial crisis are more severe than recessions that do not involve bank crises because
answer
severe financial crises collapse asset markets, lower real housing prices and cause a significant fall in GDP and employment.
question
The large budget deficits of $1.4 trillion in fiscal year 2009 and $1.3 trillion in fiscal year 2010 were
answer
caused partly by the increase in government spending including spending to bail out failed financial institutions and by the deep decline in tax revenues as incomes and profits fell.
question
Which of the following statements regarding the 2009 stimulus package is true?
answer
The largest category of expenditures was health care, social services, and education; and the largest category of tax cuts was individual tax cuts.
question
Due to the American Recovery and Reinvestment Act of 2009long dash—the stimulus package—the effect on federal government
answer
revenue and expenditures was highest in 2010 but both effects declined in 2011
question
About ________ of the American Recovery and Reinvestment Act stimulus package took the form of increases in government expenditures, and about ________ took the form of tax cuts.
answer
two-thirds; one-third
question
Between the beginning of 2009 and the end of 2010, real GDP ________, while employment ________.
answer
increase by 4.0 percent; declined by 3.3 million
question
An article in the Economist argued that:
"heavy public debt risks more than just crowding out private investment. It can, in the extreme, bring on insolvency."
Source: "Running Out of Road," Economist, June 16, 2011.
What does the article mean by "heavy public debts"?
"heavy public debt risks more than just crowding out private investment. It can, in the extreme, bring on insolvency."
Source: "Running Out of Road," Economist, June 16, 2011.
What does the article mean by "heavy public debts"?
answer
the public debt is considered to be heavy when it as a percentage of GDP debt is rather high
question
How might heavy public debts lead to crowding out?
Heavy public debt will
Heavy public debt will
answer
increase interest rates and crowd out the interest sensitive spending such as investment, consumption and net exports and will decrease aggregate output.
question
According to the crowding-out effect, if the federal government increases spending, the demand for money and the equilibrium interest rate will ___________, which will cause consumption, investment, and net exports to ___________.
answer
increase; decrease
question
As a result of crowding out in the short run, the effect on real GDP of an increase in government spending is often
answer
less than the increase in government spending.
question
What is meant by crowding out?
answer
crowding out is a decline in private expenditures as a result of increases in government purchases
question
Which of the following best describes the difference between crowding out in the short run and in the long run?
answer
In the short run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.
question
What is the long-run effect of a permanent increase in government spending?
answer
The decline in investment, consumption, and net exports exactly offsets the increase in government spending; therefore, real GDP remains unchanged.
question
The following was written by a political columnist:
"Today...the main purpose [of government's issuing bonds] is to let craven politicians launch projects they know the public, at the moment, would rather not fully finance. The tab for these projects will not come due, probably, until after the politicians have long since departed for greener (excuse the expression) pastures."
Source: Paul Carpenter, "The Bond Issue Won't Be Repaid by Park Tolls," (Allentown, PA) Morning Call, May 26, 2002.
Borrowing is a bad idea to pay for
___________________
but a good idea to pay for
______________
.
"Today...the main purpose [of government's issuing bonds] is to let craven politicians launch projects they know the public, at the moment, would rather not fully finance. The tab for these projects will not come due, probably, until after the politicians have long since departed for greener (excuse the expression) pastures."
Source: Paul Carpenter, "The Bond Issue Won't Be Repaid by Park Tolls," (Allentown, PA) Morning Call, May 26, 2002.
Borrowing is a bad idea to pay for
___________________
but a good idea to pay for
______________
.
answer
current expenses
long-lived capital goods
long-lived capital goods
question
There may be some truth in the columnist's argument, but an economist might argue that
answer
taxpayers in one year should not have to pay for a project that will benefit other taxpayers well into the future.
question
Which of the following statements about the federal debt is correct?
answer
if the debt becomes very large relative to the economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt
question
The federal government's budget surplus was $263.2 billion in 2000 and $128.2 billion in 2001.
A decrease in the federal government's budget surplus can be the result of
A decrease in the federal government's budget surplus can be the result of
answer
all the above (a recession, a decrease in taxes, an increase in government purchases)
question
In a column in the Financial Times, the prime minister and the finance minister of the Netherlands argue that the European Union, an organization of 27 countries in Europe, should have "a commissioner for budgetary discipline." They believe that:
"The new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive deficits."
Source: Mark Rutte and Jan Kees de Jager, "Expulsion from the Eurozone Has to Be the Final Penalty," Financial Times, September 7, 2011.
An "excessive" budget deficit in this context is
"The new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive deficits."
Source: Mark Rutte and Jan Kees de Jager, "Expulsion from the Eurozone Has to Be the Final Penalty," Financial Times, September 7, 2011.
An "excessive" budget deficit in this context is
answer
a relatively large budget deficit as a percentage of GDP beyond the European Union's deficit and debt rules
question
Does judging whether a deficit is excessive depend in part on whether the country is in a recession?
answer
during a recession, the deficit is higher as tax revenue fall and spending increase making gan existing deficit even bigger
question
To reduce a budget deficit,
answer
budgetary policies such as increasing taxes and cutting expenditures can be used.
question
What is the cyclically adjusted budget deficit or surplus?
answer
the cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were at potential GDP
question
Suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into recession, what will happen to the federal budget?
answer
if the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease
question
What is the difference between the federal budget deficit and federal government debt?
answer
The federal budget deficit is the year-to0year short fall in tax revenues relative to government spending (T < G + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits
question
Why do few economists argue that it would be a good idea to balance the federal budget every year?
answer
to keep a balanced budget during a recession, taxes would have to increase and government expenditures would have to decrease, which would further reduce aggregate demand and deepen the recession
question
An editorial in the Wall Street Journal declares that:
"We don't put much stock in future budget forecasts because they depend on so many variables."
Source: "Fiscal Revelation," Wall Street Journal, February 6, 2007, p. A 16.
Which of the following variables would a forecast of future federal budget deficits depend on?
"We don't put much stock in future budget forecasts because they depend on so many variables."
Source: "Fiscal Revelation," Wall Street Journal, February 6, 2007, p. A 16.
Which of the following variables would a forecast of future federal budget deficits depend on?
answer
All of the above are important variables to consider.
(GDP growth, wage growth, demographics, profit growth)
(GDP growth, wage growth, demographics, profit growth)
question
What is it about these variables that makes future budget deficits difficult to predict?
answer
the economic variables respond to economic shocks, making them less predictable
question
In 2013, Japan's government debt was approaching 250 percent of GDP, more than twice as high as in the United States. An article in the Economist noted that "the sheer size of the debt weighs ever more heavily."
Source: "Don't Mention the Debt," Economist, May 4, 2013.
Government debt weighs heavily on
Source: "Don't Mention the Debt," Economist, May 4, 2013.
Government debt weighs heavily on
answer
the Japanese economy because of the taxes required to service the debt
question
In what ways does the federal budget serve as an automatic stabilizer for the economy?
answer
During a recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. both of these occur automatically and both effects help to stabilize aggregate demand
question
In February 2013, the Congressional Budget Office (CBO) forecast that the federal budget deficit for fiscal year 2013 would be approximately $850 billion. In May 2013, the CBO revised down its forecast of the budget deficit to $642 billion. The CBO stated that a major reason for the downward revision was "factors related mainly to the strengthening economy."
Source: Susan Davis, "CBO Drops 2013 Deficit Estimate to $642 Billion," usatoday.com, May 15, 2013.
a. A "strengthening economy" could lead to a downward revision of the projected budget deficit because as GDP increases,
b. Suppose that Congress and the president were committed to balancing the budget each year. How does what happened during 2013 provide insight into difficulties they might run into in trying to balance the budget every year.
Because government spending and tax revenues
Source: Susan Davis, "CBO Drops 2013 Deficit Estimate to $642 Billion," usatoday.com, May 15, 2013.
a. A "strengthening economy" could lead to a downward revision of the projected budget deficit because as GDP increases,
b. Suppose that Congress and the president were committed to balancing the budget each year. How does what happened during 2013 provide insight into difficulties they might run into in trying to balance the budget every year.
Because government spending and tax revenues
answer
a. tax revenues increase and government spending decreases, lowering the deficit
b. change with GDP, balancing the budget annually would result in economic disruptions
b. change with GDP, balancing the budget annually would result in economic disruptions
question
Due to the American Recovery and Reinvestment Act of 2009 (the stimulus package), from 2009 through 2011, the federal budget deficit was
answer
greater than 8 percent of GDP but fell to 4 percent of GDP in 2013
question
Budget deficits automatically __________ during recessions and __________ during expansions.
answer
increase; decrease
question
The cyclically adjusted budget deficit
answer
is measured as if the economy were at potential real GDP
question
Few economists believe the federal government should attempt to balance its budget every year.
answer
True
question
Economists believe that the smaller the tax wedge for any economic activity, such as working, saving, investing, or starting a business,
answer
the more of that economic activity that will occur
question
If a tax cut has supply-side effects, then
answer
it will affect both aggregate demand and aggregate supply.
question
What is meant by supply-side economics?
answer
Supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to increase long-run aggregate supply.
question
What is the "tax wedge"?
answer
A tax wedge is the difference between the pretax and post tax return to an economic activity. For example, a tax on interest income would decrease the post tax return to investment.
question
Writing in the Wall Street Journal, Martin Feldstein, an economist at Harvard University, argues that:
"behavioral responses" of taxpayers to the cuts in marginal tax rates enacted in 1986 resulted in "an enormous rise in the taxes paid, particularly by those who experienced the greatest reductions in marginal tax rates."
Source: Martin Feldstein, "The Tax Reform Evidence from 1986," Wall Street Journal, October 24, 2011.
Cuts in marginal tax rates will
"behavioral responses" of taxpayers to the cuts in marginal tax rates enacted in 1986 resulted in "an enormous rise in the taxes paid, particularly by those who experienced the greatest reductions in marginal tax rates."
Source: Martin Feldstein, "The Tax Reform Evidence from 1986," Wall Street Journal, October 24, 2011.
Cuts in marginal tax rates will
answer
increase marginal net-of-tax income, increase the supply of labor and increase total taxes as people work longer hours
question
What does Feldstein mean by a "behavioral response" to tax cuts?
The behavioral response will be that people in
The behavioral response will be that people in
answer
higher tax brackets will experience an increase in taxable income those will work more
question
Suppose a political candidate hired you to develop two arguments in favor of a flat tax.
Consider the following list of arguments about changing to a flat tax:
A. There would be a reduction in paperwork and the compliance cost of the tax system.
B. The complexities in the current tax code allow the government to pursue other policy goals.
C. A change in the tax code would result in a more unequal distribution of income because the marginal tax rate on high-income taxpayers would be reduced.
D. There are potential increases in labor supply, savings, and investment from a lower marginal tax rate.
Which two out of the above list of arguments would you advance in favor of a flat tax?
Consider the following list of arguments about changing to a flat tax:
A. There would be a reduction in paperwork and the compliance cost of the tax system.
B. The complexities in the current tax code allow the government to pursue other policy goals.
C. A change in the tax code would result in a more unequal distribution of income because the marginal tax rate on high-income taxpayers would be reduced.
D. There are potential increases in labor supply, savings, and investment from a lower marginal tax rate.
Which two out of the above list of arguments would you advance in favor of a flat tax?
answer
A & D
question
Consider the same list of arguments about changing to a flat tax.
Which two out of the above list of arguments would you advance against a flat tax?
Which two out of the above list of arguments would you advance against a flat tax?
answer
B & C
question
It would seem that both households and businesses would benefit if the federal income tax were simpler and tax forms were easier to fill out.
However, tax laws have become increasingly complicated because
However, tax laws have become increasingly complicated because
answer
the tax laws are used to encourage certain actives and discourage others
question
A simplified tax code would reduce economic efficiency by increasing the number of decisions households and firms make solely to reduce their tax payments.
answer
False
question
The figure on the right refers to the dynamic AD-AS model. In that model, aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) all shift to the right in any given year (i.e., AD1 right arrow→ AD2 and LRAS1 right arrow→ LRAS2 ).
Notice that the graph only shows the shifts in aggregate demand (AD) and long-run aggregate supply (LRAS); for purposes of this exercise we ignore short-run aggregate supply.
Now suppose that there is an increase in marginal tax rates on individual income that affects both aggregate demand and long-run aggregate supply.
Compared to the dynamic changes shown in the graph, the result of the increase in the marginal tax rate will be that
Notice that the graph only shows the shifts in aggregate demand (AD) and long-run aggregate supply (LRAS); for purposes of this exercise we ignore short-run aggregate supply.
Now suppose that there is an increase in marginal tax rates on individual income that affects both aggregate demand and long-run aggregate supply.
Compared to the dynamic changes shown in the graph, the result of the increase in the marginal tax rate will be that
answer
the rightward shift in aggregate demand will be smaller and the rightward shift in long-run aggregate supply will be smaller.
question
As a result, when compared to Y1, real GDP would _______
answer
increase
question
Compared to P1, the price level would
answer
increase if aggregate demand increase more than long-run aggregate supply
question
Suppose that the tax increase only affected aggregate demand. Compared to the above, the effect on real GDP would be
____________
and the effect on the price level would be _____________
____________
and the effect on the price level would be _____________
answer
smaller; larger
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