Macro Ch. 10 Practice

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Fiscal policy is concerned with

government spending and taxation only

Equal increases in government purchases and in net taxes have equal but opposite effects on the level of real GDP demanded.


If government expenditures or taxes are assumed to be autonomous, they

do not depend upon on the level of GDP

If the MPC is 0.75, a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP demanded by

$300 Billion

Which of the following statements best explains the effects of transfer payments and taxes on aggregate spending?

Transfer payments and taxes affect aggregate spending indirectly by first changing disposable income and thereby changing consumption.

Assume autonomous net taxes rise by $400; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, saving will initially

Fall by $100

Assume there is no crowding-out effect. By how much would government purchases have to change if the government wanted to increase the equilibrium real GDP demanded by $1,000 and the MPC were 0.9?


When spending by the federal government exceeds net taxes,

the price level tends to rise

To close an expansionary gap, the government can

decrease government spending, which will decrease aggregate demand

Suppose that the economy is experiencing 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 decreases purchases by

more than $200

The steeper the short-run aggregate supply curve,

the smaller the impact of a shift in aggregate demand on equilibrium output

According to classical economists, government intervention is

not necessary to maintain full employment

Keynes thought that one macroeconomic problem is that the economy

can tend toward an equilibrium level of output that is below the potential level

Government transfer payments are a good example of an automatic stabilizer.


Which of the following is true of automatic stabilizers?

They include the unemployment compensation program.

During the 1970s, demand-management policy

was found to be highly unsuitable in periods of stagflation such as the decade of the 1970s

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

continue causing inflation

Which of the following is not a weakness of fiscal policy as a tool of economic stabilization?

households may not respond to changes they perceive as permanent

Fiscal policy under the Reagan administration was intended to

stimulate the economy by decreasing taxes in order to increase aggregate supply

Transfer payments are included in the government budget deficit but not included in the government purchases component of GDP.


A continuing resolution

allows agencies to spend at the rate of the previous year in the absence of an approved budget

Which of the following is not a problem with the U.S. federal budget process?

the lack of detail in the budget

The federal budget deficit becomes __________ during recessions because __________.

larger; transfer payments increase and tax revenues decline

Which of the following best describes the philosophy of functional finance?

Policy makers should focus on keeping the unemployment rate at the natural rate, even if this means budget deficits.

Which of the following statements about the tax cut enacted in 1981 during the Reagan administration is correct?

The tax cut and the recession of 1982 combined to produce one of the largest peace-time deficits ever experienced up to that time.

If a federal budget deficit causes crowding out,

real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because investment declines

If action by the President and Congress reduces the federal government budget deficit, then interest rates will __________, the U.S. dollar will __________, and the foreign trade deficit will __________.

decrease; depreciate; decrease

The difference between the federal budget deficit and the national debt is that the

deficit is a flow and the debt is a stock

Increases in the fraction of national debt held by foreigners __________ the burden of debt service on future generations __________.

increase; because taxes to pay the debt are collected within the country but more interest payments on the debt are sent outside

The long-run opportunity cost of government spending's crowding out of private investment

would be greater if the government's expenditures were devoted to increasing retirement benefits rather than to educating the work force

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