Macro Ch. 10

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All of the following are variables that can be manipulated to affect fiscal policy except one. Which is the exception?

Interest Rate

A $200 increase in government purchases has a greater effect on the equilibrium level of real GDP than a $200 decrease in autonomous net taxes would.

True

f the multiplier for autonomous government purchases equals 4, then it is true that the simple tax multiplier

equals -3

If the MPC equals 0.75 and G increases by $100, real GDP demanded will increase by

$400

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially

Rise by $200

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded will

Rise by $600

To close a contractionary gap using fiscal policy, the government can

increase government spending by less than the size of the gap

An increase in federal budget deficit

may increase inflation

When the government closes an expansionary gap with a change in government spending, the __________ in government spending leads to __________.

decrease; a decrease in both real GDP and the price level

Suppose that the economy has an expansionary gap of $1,000 and the MPC equals 0.8. With an upward-sloping short-run aggregate supply curve, the government can close the gap if it increases autonomous net taxes by

more than $250

The steeper the short-run aggregate supply curve,

the larger the impact of a shift in aggregate demand on the equilibrium price level

The difference between the classical approach and the Keynesian approach to fiscal policy is

Keynesians believe that it may be necessary that government increase aggregate demand so as to stimulate output and employment, if the economy is to achieve its potential output

The Classical economists believed in the self-correcting nature of the economic system. They believed that the major adjustment

mechanisms were flexible wages, prices and interest rates

Which of the following is not an automatic stabilizer?

new legislation to increase tax rates

A progressive income tax ensures that during expansionary periods,

disposable income will increase by less than the increase in GDP

The reason that fiscal policy was not helpful in the 1970s was that such policy is aimed at

aggregate demand only, but the problem was in aggregate supply

If policy makers think the natural rate of unemployment is higher than it really is, then their policies designed to move the economy to the estimated natural rate, if continued over the long run, will

keep the economy below its potential GDP level

Which of the following is not a weakness of fiscal policy?

Fiscal policy works only during periods of stagflation.

The Reagan experiment in supply-side economics resulted in all of the following except

A reduction in federal debt

The federal government budget is

a plan for government expenditures and revenues for the coming year

If government increased Social Security benefits and decreased the salaries of government workers by the same amount, we would expect the immediate effect to be

no change in the budget deficit because government purchases of goods and services have decreased by the same amount as transfer payments have increased

Problems with the federal government budget process include

the use of continuing resolutions that reward last year's programs without adequate review of performance

If the government runs a cyclically balanced budget, its revenue will equal its expenditure

over the course of the business cycle

An annually balanced budget

accentuates cyclical swings by increasing government spending during expansions and reducing it during recessions

In 1981, policy makers in the Reagan administration predicted a balanced budget for the 1980s because

growth in GDP was expected to be large enough to lead to an increase in tax revenues despite the tax cut

The crowding in of private investment is associated with

more favorable business expectations resulting from an increase in aggregate demand induced by increased government borrowing

Which of the following steps does not belong in a sequence reflecting the impact on international markets of increased borrowing to finance a large government budget deficit?

The rising value of the dollar leads to increased U.S. exports and reduced imports.

The national debt is

a stock variable measuring the net accumulation of past deficits

Among the following cases, the opportunity cost of crowding out is the smallest when the government spends $9 billion

on new interstate highways

Some economists have predicted that parents will act to offset the impact of deficit spending on their children by

saving more to increase gifts and bequests to their children

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