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Exam 27: Fiscal Policy

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Question 1

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Which of the following best describes supply-side economics?

A) Labor productivity affects aggregate supply.
B) Education affects labor productivity which affects aggregate supply.
C) Education affects the incentive to work, save, and invest and, therefore, aggregate supply.
D) Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply.

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Question 2

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A change in consumption spending caused by income changes is ________ change in spending,and a change in government spending that occurs to improve roads and bridges is ________ change in spending.

A) an induced; an autonomous
B) an expansionary; a contractionary
C) an autonomous; an induced
D) a contractionary; an expansionary

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Question 3

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Which of the following would be most likely to induce Congress and the president to conduct expansionary fiscal policy? A significant

Table 27-1 -Refer to Table 27-1.Suppose the economy is in the state described by the table above.What problem will occur in the economy if no policy is pursued? What fiscal policy tools could be used to combat the problem? Draw a dynamic aggregate demand and aggregate supply diagram to illustrate the appropriate fiscal policy to use in this situation.

Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have to do with the government purchases multiplier?

How can tax simplification be beneficial to the economy?

Economists who believe the supply-side effects of tax cuts are small essentially believe that

If Congress and the president pursue an expansionary fiscal policy at the same time as the Federal Reserve pursues an expansionary monetary policy,how might the expansionary monetary policy affect the extent of crowding out in the short run?

Crowding out refers to a decline in ________ as a result of an increase in ________.

Suppose the federal budget deficit for the year was $100 billion and the economy was in a recession.If the economy had been at potential GDP,it is estimated that tax revenues would have been $60 billion higher and government spending on transfer payments $50 billion lower.Using these estimates,the cyclically adjusted budget

A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect.

The aggregate demand curve will shift to the right ________ the initial decrease in taxes.

If the economy is falling below potential real GDP,which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

The income tax system serves as an automatic stabilizer over the course of the business cycle.

The level of crowding out associated with a tax cut will be smaller if the tax change has a supply-side effect than it will be if it only has a demand-side effect.

Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant

An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

Figure 27-1 -Refer to Figure 27-1.Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued.Using the static AD-AS model in the figure above,this would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) B to A. E) A to E.

The tax increases necessary to fund future Social Security and Medicare benefit payments would be

Figure 27-4 -Refer to Figure 27-4.In the graph above,the shift from AD₁ to AD₂ represents the total change in aggregate demand.If government purchases increased by $50 billion,then the distance from point A to point B ________ $50 billion.