Exam 13: Fiscal Policy Appendix Taxes and the Multiplier

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _____ transfer payments by _____ $40 billion.

In the basic equation of national income accounting, GDP = C + I + G + X - IM, the government directly controls _____ and influences _____ through fiscal policy.

The tax multiplier for someone living below the poverty line is smaller than the tax multiplier for someone with an annual income of $1 million.

Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this recessionary gap.

Social Security spending is projected to:

Since 1964, the budget deficit _____ of GDP.

Use the following to answer questions : Figure: Short- and Long-Run Equilibrium -(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E₁, the appropriate policy to return the economy to potential output is a(n):

President Johnson's use of a temporary 10% surcharge on income taxes is a classic example of _____ policy.

Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.

Public debt is government debt held by individuals and institutions outside the government.

Expansionary fiscal policy:

Contractionary fiscal policy includes:

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government increases spending by $10 billion, real GDP will increase by:

For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is smaller than the multiplier effect of a tax cut of $100 billion.

Suppose that real GDP is $1,500, potential GDP is $1,200, and the marginal propensity to consume is 0.8. If the government is going to close the gap by changing government purchases of goods and services and imposes no taxes, what specific fiscal policy action should policy makers take?

Funding for Social Security and Medicare:

Expansionary fiscal policies:

Use the following to answer questions: Figure: Fiscal Policy II -(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E₁. If there is an increase in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

Use the following to answer questions : Figure: Fiscal Policy Choices -(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be appropriate to use contractionary fiscal policy to shift aggregate demand in _____ from _____.