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Macro Chapter 12

The use of government taxes and spending to alter economic outcomes is known as
Fiscal policy.
Which of the following represents the use of fiscal policy to achieve a fiscal stimulus?
Greater government expenditure or lower taxes.
If full-employment income and equilibrium income are equal for a country, then a tax cut will result in
Excess AD.
Which of the following is an appropriate fiscal policy prescription for the government to follow?
Deficit reduction when there is excess AD.
Deficit spending results whenever the government
Finances current expenditures that exceed current tax revenues.
Which of the following policies will reduce the budget deficit while achieving greater fiscal restraint?
. Less government expenditure and higher taxes.
With greater deficit spending, ceteris paribus,
Any inflationary gap will become larger.
If full-employment output exceeds equilibrium output, greater deficit spending will result in
Smaller recessionary gap.
With an increase in deficit spending, the
Aggregate demand curve shifts to the right.
If the economy is in a recession,
It is operating inside the production possibilities curve, and the opportunity cost of deficit spending is zero.
A budget surplus is
An excess of government revenues over government expenditures in a given time period.
When there is excess aggregate demand, the appropriate fiscal policy would be for the government to
Make budget surpluses larger.
In order to reduce the U.S. debt
The government should spend less than it collects in tax revenues.
According to Keynes, an unbalanced budget is appropriate in all of the following situations except when
The economy is at full employment.
Which of the following is an argument against balancing the federal budget?
Doing so may prevent the government from pulling the economy out of recession.
The fiscal year
Is the 12-month period used for federal government accounting purposes.
The fiscal year for the federal government begins on
October 1.
The elements of the federal budget not determined by past legislative or executive commitments are
. Discretionary fiscal spending.
Discretionary expenditures account for approximately
One-fifth of the federal budget.
Much of each year’s federal budget is considered “uncontrollable” because
Most of the current revenues and expenditures are the result of decisions made in prior years.
Uncontrollable government spending includes
Interest payments on the national debt.
In order to maintain a balanced budget every year, during a recession the government would have to
Decrease spending or increase taxes or both.
Fiscal restraint is
Tax hikes and/or spending cuts intended to reduce aggregate demand.
Which of the following is not an automatic stabilizer?
Defense spending.
Automatic stabilizers tend to stabilize the level of economic activity because they
Increase spending during recessions and reduce spending during inflationary periods.
Automatic stabilizers
Help to moderate the extremes of the business cycle.
Spending for unemployment compensation and welfare benefits increase automatically
When the economy goes into recession.
Which of the following is an automatic stabilizer that reduces tax receipts during a recession?
Corporate and individual income taxes.
All of the following contribute to greater deficits when unemployment rises and reduce the deficit during an inflationary gap except for
U.S. exports.
A progressive income tax system is particularly effective as an automatic stabilizer because
In a booming economy, taxpayers move into higher tax brackets, which restrains their spending.
Which of the following is a possible effect of automatic stabilizers on the federal budget?
decrease in the deficit during an expansion.
An increase in unemployment, ceteris paribus,
Reduces a budget surplus.
Which of the following is most likely to increase a federal budget surplus?
A higher inflation rate and a lower unemployment rate.
Which of the following is most likely to reduce a federal budget surplus?
A recession.
Which of the following might encourage the government to let inflation rates rise?
A higher inflation rate reduces the budget deficit.
For the convenience of analyzing the part of the deficit that is sensitive to fiscal policy, the actual deficit is divided into which of the following components?
Structural and cyclical deficits.
In contrast to the structural deficit, the cyclical deficit reflects
Fluctuations in economic activity.
Which of the following results from a change in the business cycle, ceteris paribus?
Cyclical unemployment.
If the cyclical deficit shrank by $60 billion while the structural deficit increased by $35 billion, the total deficit
Fell by $25 billion.
If the budget deficit for each year is held to a constant nominal value during constant inflationary times, then the inflation-corrected or real value of the total debt would
Rise at a decreasing rate.
The structural deficit represents
Federal revenues minus federal expenditures at full employment under current fiscal policy.
If the structural deficit is zero,
At full employment, the budget is balanced.
Suppose the economy is at a full-employment GDP of $1 trillion and the tax revenue received by the federal government is always one-fifth of GDP. If planned government expenditure is $300 billion, the structural
Deficit is $100 billion.
If the total budget deficit is $200 billion and the deficit at full employment is $120 billion, then the
Cyclical deficit is $80 billion.
The largest percentage of U.S. national debt to GDP occurred during
World War II.
Which of the following is the best indication that the government is pursuing restrictive fiscal policy?
The structural deficit decreases.
A decrease in private sector borrowing and spending caused by increased government borrowing is
. Crowding out.
Crowding out is most likely to occur when the federal government
Runs a deficit and sells bonds to make up the difference.
Increased government purchases crowd out private purchases whenever the economy is
On the production possibilities curve.
Which of the following is not true when the economy is fully employed and government bonds are sold to finance greater government spending?
The government is running a cyclical deficit.
The opportunity cost of the debt is
Less of an issue if the economy is below full employment since crowding out is less likely to occur.
An opportunity cost that occurs because of increased government spending is
The crowding out of private sector output.
The government can use a budget surplus to do all of the following except
Decrease the money supply.
If there was a federal budget surplus and the government decided to either increase spending or decrease taxes
The budget surplus would get smaller.
An increase in private sector borrowing and spending caused by decreased government borrowing is known as
Crowding in.
Which of the following would occur if the federal government decided to use a budget surplus to reduce the existing debt?
Crowding in and private sector output would increase.
Crowding in is the result of
Falling interest rates.
The national debt is
The accumulation of all annual deficit and surplus flows.
The U.S. government incurred a national debt for the first time during
The Revolutionary War.
The debt would cease to grow if
The federal government balanced its budget.
The national debt
Equals the dollar amount of outstanding U.S. Treasury bonds.
The fiscal agent of the U.S. government is the
U.S. Treasury.
In the 20th century, the ratio of the U.S. debt to GDP has
Risen in response to wars.
A measure of the burden of continual deficit financing over time is the ratio of
The debt to the GDP.
The national debt increased by nearly $2 trillion in the 1980s because of all of the following except
College financing.
Debt accumulation by the U.S. government in the 1980s
Exceeded the debt the country had accumulated over the preceding 200 years.
Which of the following contributed to the increase in the national debt during the 1990s?
The bailout of failed savings and loan associations.
Policies designed to pay off the national debt will result in:
A smaller level of aggregate demand
The U.S. federal debt that accumulated between 1970 and 2010
Is an asset and a liability for the U.S. economy.
An obligation to make future payment is
. A liability.
When the Federal Reserve System buys bonds in the open market, the national debt
Is not affected.
Internal ownership of the national debt occurs when U.S. Treasury bonds are purchased b all of the following except
Foreign countries that we trade with.
Federal agencies hold roughly _____ percent of all outstanding Treasury bonds.
16
Which of the following owns the largest portion of the U.S. national debt?
The federal government.
The largest single holder of the U.S. national debt after the U.S. government is
The foreign sector.
The U.S. private sector holds about _____ percent of outstanding U.S. Treasury bonds.
24
U.S. Treasury bonds owned by U.S. households, institutions, and government entities are referred to as
Internal debt.
Foreign households and institutions hold approximately _____ percent of the U.S. national debt.
31
When the U.S. Treasury issues new bonds to replace bonds that have matured, it is engaging in
Debt refinancing.
Interest payments on the national debt
Are a redistribution of income from taxpayers to bondholders.
The “real burden” of the debt is directly related to
The idea of opportunity cost.
The cost of servicing the debt may increase if
Interest rates rise.
Debt service
. Refers to the annual interest payments on the debt.
Selling bonds to finance new government debt leads to an opportunity cost that is
The same as financing government debt with taxes. D. Dependent on who buys the bonds.
Deficit financing tends to change the mix of output in the direction of more
Public sector goods.
The burden of the internal portion of the debt is incurred
When the debt-financed activity takes place.
If debt-financed less productive government spending crowds out more productive private investment, future generations will bear
. Some of the burden of the debt due to lower productive capacity.
If deficit spending does not contribute to public investment and crowds out private investment, then
The rate of economic growth will decline, ceteris paribus.
Which of the following statements about the U.S. national debt is not correct?
The primary economic costs of the debt are being passed on to future generations.
External debt of the United States refers to
U.S. government debt held by foreigners.
At the time it occurs, external financing of the debt allows the economy to
Consume beyond the production possibilities curve.
The burden of the debt is passed on to future generations when the debt is held by
Foreign households.
A deficit ceiling directly limits
The rate at which government spending can exceed government revenue.
The Gramm-Rudman-Hollings Act of 1985 created a
. Deficit ceiling.
Which of the following is not an explanation of why the Gramm-Rudman-Hollings Act proved inadequate in reducing the deficit?
Congress controls only the cyclical portion of government spending.
If Congress failed to keep the deficit below the ceiling, then the Gramm-Rudman-Hollings Act required
Automatic spending cuts.
Debt ceilings are designed to
Reduce the deficit.
To pay back Social Security loans, Congress could do all of the following except
Sell fewer U.S. Treasury bonds.

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