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Chapter 13

Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending:

is primarily for capital-type goods.
is financed by borrowing.
is financed by taxation.
increases during a period of recession, rather than prosperity.

is financed by borrowing.
The political business cycle refers to the possibility that:

– there is more inflation during Democratic administrations than during Republican administrations.
– recessions coincide with election years.
– incumbent politicians will be reelected regardless of the state of the economy.
– politicians will manipulate the economy to enhance their chances of being reelected.

politicians will manipulate the economy to enhance their chances of being reelected.
The crowding-out effect of expansionary fiscal policy suggests that:

– government spending increases at the expense of private investment.
– imports replace domestic production.
– saving increases at the expense of investment.
– private investment increases at the expense of government spending.

government spending increases at the expense of private investment.
*The crowding-out effect refers to the possibility that deficit spending may motivate people to increase their saving in anticipation of higher future taxes.

True
False

*False
Recessions have contributed to the public debt by:

reducing national income and therefore tax revenues.
increasing the international value of the dollar.
increasing national saving.
increasing real interest rates.

reducing national income and therefore tax revenues.
An economist who favored expanded government would recommend:

– tax cuts during recession and tax increases during inflation.
– tax cuts during recession and reductions in government spending during inflation.
– tax increases during recession and tax cuts during inflation.
– increases in government spending during recession and tax increases during inflation.

increases in government spending during recession and tax increases during inflation.
A specific reduction in government spending will dampen demand-pull inflation by a greater amount, the:

smaller is the economy’s MPS.
flatter is the economy’s aggregate supply curve.
smaller is the economy’s MPC.
less the economy’s built-in stability.

smaller is the economy’s MPC.
The public debt is held as Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

True
False

True
The immediate primary cause of the swing from Federal budget surpluses in 2000 and 2001 to a budget deficit in 2002 was:

the acceleration of inflation in 2001 and 2002.
the tax cuts of 2001.
spending increases relating to the wars in Afghanistan and Iraq.
the recession of 2001.

the recession of 2001.
The effect of a government surplus on the equilibrium level of GDP is substantially the same as:

an increase in investment.
a decrease in imports.
an increase in consumption.
an increase in saving.

an increase in saving.
The crowding-out effect of expansionary fiscal policy suggests that:

– consumer and investment spending always vary inversely.
– increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
– tax increases are paid primarily out of saving and therefore are not an effective fiscal device.
– it is very difficult to have excessive aggregate spending in the U.S. economy.

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
The portion of the public debt held outside Federal agencies and the Federal Reserve is:

– equally split between U.S. and foreign lenders.
– larger than the portion held by Federal Agencies and the Federal Reserve.
– all held by foreign lenders.
– smaller than the portion held by Federal Agencies and the Federal Reserve.

larger than the portion held by Federal Agencies and the Federal Reserve.
Which of the following best describes the idea of a political business cycle?

– Fiscal policy will result in alternating budget deficits and surpluses.
– Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle.
– Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.
– Politicians are more willing to cut taxes and increase government spending than they are to do the reverse.

Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.
An economist who favors smaller government would recommend:

– increases in government spending during recession and tax increases during inflation.
– tax cuts during recession and reductions in government spending during inflation.
– tax cuts during recession and tax increases during inflation.
– tax increases during recession and tax cuts during inflation.

tax cuts during recession and reductions in government spending during inflation.
An appropriate fiscal policy for a severe recession is:

a decrease in tax rates.
a decrease in government spending.
an increase in interest rates.
appreciation of the dollar.

a decrease in tax rates.
In 2009, the U.S. public debt was about:

$2.9 trillion.
$6.8 trillion.
$5.1 trillion.
$11.9 trillion.

$11.9 trillion.
Fiscal policy is mainly undertaken by the Federal Reserve.

True
False

False
A tax reduction of a specific amount will be more expansionary, the:

smaller is the economy’s MPC.
smaller is the economy’s multiplier.
less the economy’s built-in stability.
larger is the economy’s MPC.

larger is the economy’s MPC.
An increase in the cyclical deficits will automatically increase the cyclically-adjusted budget deficit.

True
False

False
Built-in stability means that:

– Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity.
– with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.
– government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.
– an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby stabilize the economy.

with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.
In 2009, the U.S. Federal debt held by the public was:

about a third as large as the GDP.
about twice as large as the GDP.
held largely by foreign governments.
about four times as large as the GDP.

about a third as large as the GDP.
Which of the following best describes the built-in stabilizers as they function in the United States?

– Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
– The size of the multiplier varies inversely with the level of GDP.
– Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises.
– Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP.

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
It is more meaningful economically to measure the public debt relative to the GDP than to measure it in absolute terms.

True
False

True
The cyclically-adjusted budget deficit for the United States:

– represented a contractionary fiscal policy.
– rose to -7.3 percent of potential GDP in 2009.
– was zero in 2009, but the cyclical deficit created by the recession was -7.3 percent of potential GDP.
– changed to a surplus in 2009.

rose to -7.3 percent of potential GDP in 2009.
Tax increases and government spending cuts by state governments during recessions often reduce the expansionary impact of fiscal policy by the Federal government.

True
False

True
Suppose the government purposely changes the economy’s cyclically-adjusted budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n):

high-interest rate policy.
expansionary fiscal policy.
neutral fiscal policy.
contractionary fiscal policy.

contractionary fiscal policy.
In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions the government should:

reduce tax rates and/or increase government spending.
encourage personal saving by increasing the interest rate on government bonds.
discourage private investment by increasing corporate income taxes.
decrease government expenditures.

reduce tax rates and/or increase government spending.
Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward:

– an excess of government expenditures over tax receipts.
– an equality of tax receipts and government expenditures.
– an excess of tax receipts over government expenditures.
– a reduction of subsidies and transfer payments and an increase in tax rates.

an excess of government expenditures over tax receipts.

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