Exam 13: Fiscal Policy Appendix Taxes and the Multiplier

Suppose that marginal propensity to consume is equal to 0.9 and the government increases its spending by $200 billion. This increase in spending is financed by a $200 billion increase in taxes. As a result of this, GDP will:

If the marginal propensity to consume is 0.8 and government transfers decrease by $30 billion, real GDP will decrease by less than $150 billion.

Which of the following fiscal policies would make a budget surplus smaller or a budget deficit larger?

If _____, expansionary fiscal policy is most likely to crowd out private spending.

Consider an economy whose households save 20% of increases in their income. If the government lowers its transfers by $100 billion, then the real GDP will:

Use the following to answer questions: Figure: Inflationary and Recessionary Gaps -(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. Which of the following measures an inflationary gap?

Use the following to answer questions: Figure: AD-AS -(Figure: AD-AS) Look at the figure AD-AS. Suppose the economy is producing the output level Y_p and a negative demand shock shifts the AD₁ curve to AD₃. The economy now has a(n) _____ gap, which can be closed by _____ fiscal policy.

Use the following to answer questions: Figure: Inflationary and Recessionary Gaps -(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD₃ to AD₁ could be caused by:

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. The government should _____ aggregate demand by _____ taxes to close the _____ gap.

Use the following to answer questions: Figure: Fiscal Policy I -(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E₂. If there is an increase in government transfers_____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A budget deficit necessarily indicates that fiscal policy is expansionary.

Medicaid, Medicare, and Social Security are examples of:

The new stability pact signed in 2011 by the nations that adopted the euro required each country to:

If a country has a very high level of public debt, lenders may insist on austerity measures of raising taxes and decreasing government spending, which worsens economic conditions.

Medicare covers much of the cost of medical care for Americans with low incomes.

Time lags in the implementation of fiscal policy:

Which of the following is NOT an example of government transfers?

In 2011 many European countries signed a stability pact in which they agreed to keep their structural budget balanced.

If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.

Lyndon Johnson's tax surcharge was an expansionary fiscal policy that increased aggregate demand.