Exam 13: Fiscal Policy Appendix Taxes and the Multiplier

When the budget is in deficit, the government generally:

Suppose that the budget deficit of a country remains level for five years. The federal debt will:

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 a decrease in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

Expansionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.

A change in taxes shifts the aggregate demand curve by less than a change in government spending for goods and services and has a smaller effect on real GDP.

Government borrowing will not crowd out private investment spending if unemployment is _____ and the fiscal expansion causes a(n) _____ in incomes and a(n) _____ in saving at each interest rate.

Higher government transfers or lower taxes make a budget surplus smaller or a budget deficit larger.

In the United States 49 of the 50 states are required to have an annually balanced budget, which worsens the severity of the business cycle.

The income expenditure model predicts that if the marginal propensity to consume is 0.75 and the federal government increases spending by $100 billion, real GDP will increase by:

Fiscal policy that decreases aggregate demand is:

If the ratio of debt to GDP increases over time, it means that the government's burden of paying the debt is decreasing and default is less likely.

In most years since 1970, the actual budget deficit has been more than 25% of GDP.

The effect of automatic stabilizers is to increase the size of the multiplier.

Use the following to answer questions: Figure: Short- and Long-Run Equilibrium II -(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. Which of the following would be the appropriate response on the part of the government upon viewing the state of the economy?

An increase in government transfer payments of $100 billion and a tax cut of $100 billion will have equal effects on the budget balance and unequal effects on real GDP.

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 E₁. If there is a decrease in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

If there is an inflationary gap in the economy, discretionary fiscal policy will likely include action to:

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If GDP is $850 billion:

Use the following to answer questions : Figure: Fiscal Policy Choices -(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. If the government uses discretionary fiscal policy for the economy in panel (b) when real GDP is Y₁, government spending is likely to be _____ and taxes are likely to be _____.

Use the following to answer questions : Scenario: Fiscal Policy Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. -(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose that actual output is 700 billion arcs, and the government of Arcadia decides to tax its citizens. To bring the economy to potential output, the government should: