Exam 26: Fiscal Policy

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.

In practice, discretionary fiscal policy has

Because the government is the official issuer of money, it does not have to pay interest on its debt.

Most of the spending in the enacted budget is determined by

Explain the major trends in the debt to GDP ratio since 1950.

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.

To determine the size of the automatic stabilizer in 2011,

Most state and local government expenditures are for purchases of goods and services.

Policy rules tend to make the budget balance less predictable.

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.

If taxes became more progressive, we would expect that whenever there was an economic fluctuation

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

Less than 20 percent of the U.S. budget currently consists of social security, Medicare, and Medicaid.

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?

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.

Changes in government purchases always lead to fluctuations of real GDP from potential.

If real GDP is equal to potential GDP, the cyclical surplus is zero.

The symbol G used throughout the text stands for

Discretionary fiscal policy

In 2010, the debt to GDP ratio was equal to about 150 percent.