Exam 13: Fiscal Policy Appendix Taxes and the Multiplier

If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is:

When potential output is less than actual aggregate output:

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':

The multiplier effect of an increase in transfer payments is smaller than that of an equal increase in government purchases of goods and services because some of the transfer payment is likely to be saved.

A change in government transfers shifts the aggregate demand curve by more than a change in government spending for goods and services and has a larger effect on real GDP.

Government tax revenue rises and falls with the business cycle as:

Most economists do not support a law that requires the federal budget to be balanced every year. Explain why.

The cyclically adjusted budget deficit:

Use the following to answer questions : Figure: Fiscal Policy Choices -(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. In panel (a), the economy is initially at output level Y₁ and there is:

A contractionary fiscal policy either _____ government spending or _____ taxes.

Economists generally believe that during an expansion, an economy should:

States that are required by their constitution to have annually balanced budgets are likely to _____ than those not required to balance their budget.

Which of the following is an automatic stabilizer?

Changes in the budget balance:

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 larger than the multiplier effect of a tax cut of $100 billion because:

An expansionary fiscal policy:

Explain why a constitutional amendment requiring the federal government to balance the budget annually is a bad idea.

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

If government spending increases and taxes decrease:

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', the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.