Exam 13: Fiscal Policy Appendix Taxes and the Multiplier

Use the following to answer questions: Figure: AD-AS -(Figure: AD-AS) Look at the figure AD-AS. Consider an economy that is producing an output level of Y₁. The economy has a(n) _____ gap, which can be closed by _____ fiscal policy.

Use the following to answer questions: Figure: Fiscal Policy Options -(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD":

If the marginal propensity to save is 0.25, investment spending is $600 million, and the government increases its transfers by $100 million, then real GDP increases by:

An inflationary gap can be closed with:

When the unemployment rate decreases, the budget:

The automatic stabilizer in government tax revenue that occurs when GDP rises _____ the multiplier.

Spending promises made by the government that are effectively a debt, although they are not included in the usual debt statistics, are known as:

Suppose that real GDP is $1,300, potential GDP is $1,800, and the marginal propensity to consume is 0.6. 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?

The promise to pay Social Security benefits to the baby boomers is an example of the implicit liabilities of the U.S. government.

Use the following to answer questions: Figure: Short-Run Equilibrium -(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y₁ and P₁, it is in a(n):

A $100 million increase in government spending increases equilibrium GDP by:

Consumer spending will likely rise if:

An increase in government spending of $300 billion and a tax cut of $300 billion will have _____ effects on the budget balance and _____ effects on real GDP.

Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the marginal propensity to consume is equal to 0.80. The government should _____ taxes by _____ to bring the economy to potential output.

The difference between a budget deficit and government debt is that:

The tax and government transfer payment multiplier is smaller than the government purchases multiplier because all of an increase in government purchases is spent, only some of tax cuts or increases in government transfers is spent.

Use the following to answer questions: Figure: Fiscal Policy Options -(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is ADʺ, the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.

Fiscal policy measures of the same dollar amounts will have equal effects on the budget balance but may change real GDP by different amounts.

Suppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

Most economists believe that a balanced budget requirement would: