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ECON&202 Homework #4

Built-in stability is exemplified by the fact that with a progressive tax system, net tax revenues decrease when GDP decreases.
Which of the following fiscal policy changes would be the most contractionary?
A $10 billion increase in taxes and a $30 billion cut in government spending
Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to:
increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.
Discretionary fiscal policy is often initiated on the advice of the:
Council of Economic Advisers
Other things equal, an increase of Treasury bonds from $100 billion to $120 billion in the economy would:
increase the public debt from $460 billion to $480 billion.
When Social Security contributions have exceeded payouts in the past, the excess amounts were used to help finance the Federal government’s budget deficits.
The so-called crowding-out effect refers to government spending crowding out private investment spending.
The United States has experienced both budget surpluses and deficits since 2000.
Refer to the diagram. Discretionary fiscal policy designed to slow the economy is illustrated by:
The shift of the curve from T2 to T1.
When current tax revenues exceed current government expenditures and the economy is achieving full employment:
the cyclically adjusted budget has a surplus.
(Last Word) In 1960 the ratio of workers to Social Security and Medicare beneficiaries was ______; by 2040 it is projected to be _________.
5:1; 2:1
Refer to the data. The 10 percent proportional tax on income would cause:
both consumption and saving to increase by smaller and smaller absolute amounts as GDP rises
The American Recovery and Reinvestment Act of 2009 is a clear example of:
Discretionary fiscal policy that made the cyclically-adjusted budget become more negative
Which one of the following might offset a crowding-out effect of financing a large public debt?
An increase in public investment.
It is possible for an increase in government spending to encourage, instead of crowding out, private investment.
The political business cycle refers to the possibility that:
politicians will manipulate the economy to enhance their chances of being reelected.
Refer to the diagram. The equilibrium level of GDP is:
When the Federal government uses taxation and spending actions to stimulate the economy it is conducting:
Fiscal Policy
Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD2 describes the current situation, appropriate fiscal policy would be to:
do nothing since the economy appears to be achieving full-employment real output.
As of 2012, more than half of the total debt of the U.S. government was owed to foreigners.
According to Congressional Budget Office (CBO) projections:
budget deficits are expected to remain large for the next several years.
The American Recovery and Reinvestment Act of 2009 was implemented primarily to:
stimulate aggregate demand and employment.
The average tax rate required to service the public debt is roughly measured by:
interest on the debt as a percentage of the GDP.
An economist who favors smaller government would recommend:
tax cuts during recession and reductions in government spending during inflation.
If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by:
increasing government spending by $4 billion.
An increase in the cyclical deficits will automatically increase the cyclically adjusted budget deficit.
A major reason that the public debt cannot bankrupt the Federal government is because:
The public debt can be easily refinanced by issuing new bonds
If the government wants to reduce unemployment using fiscal policy, it may do so by increasing government spending.
Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should:
increase government expenditures by $50 billion.
Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.

Refer to the information. The operational lag of fiscal policy is reflected in event(s):

The concept of a “political business cycle” implies a misuse of fiscal policy making it a source of economic instability.
Refer to the data. A 10 percent proportional tax on income would:
reduce the size of the multiplier and make the economy more stable.
The portion of the public debt owed to foreigners does not represent any real economic burden to Americans because we received money from foreigners when we incurred the debt.
Refer to the data in the table above. The direction of fiscal policy became more contractionary from:
2003 to 2004
The U.S. public debt:
consists of the historical accumulation of all past federal deficits and surpluses.
Contractionary fiscal policy is so named because it:
is aimed at reducing aggregate demand and thus achieving price stability
The lag between the time that the need for fiscal action is recognized and the time action is actually taken is referred to as the:
Administrative lag
Which of the following fiscal policy actions is most likely to increase aggregate supply?
A reduction in interest rates that encourages consumers to purchase more durable goods.
Which of the following fiscal policy actions is most likely to increase aggregate supply?
An increase in government spending on infrastructure that increases private sector productivity.
A contractionary fiscal policy shifts the aggregate demand curve leftward.
The goal of expansionary fiscal policy is to increase:
Real GDP
Refer to the table for a fictional economy. The changes in the budget conditions between 2000 and 2001 best reflect:
an expansion of real GDP and an automatic increase in tax revenues.
Expansionary fiscal policy will tend to reduce the budget deficit.
An increase in the public debt and its subsequent repayment will tend to:
Mildly increase the income inequality in the U.S.
The federal budget deficit is found by:
subtracting government tax revenues from government spending in a particular year.
Through the start of 2009, Social Security revenues exceeded payouts, and the excess inflow was used to buy:
Treasury Securities
The crowding-out effect of the public debt may be dampened if the investment-demand curve is shifting to the right.
As measured by the cyclically adjusted budget, the U.S. government engaged in a contractionary fiscal policy in 2005 and 2006.
The crowding-out effect tends to be stronger when the economy:
Is at, or close to, full employment
Refer to the above graph. If the economy was initially in equilibrium at point 3 and a government deficit makes interest rates increase by 4 percentage points, then the crowding-out effect would be a reduction of:
$20 billion in investment

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