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1 1 of 12 11/12/2013 9:31 AM The use of government taxes and spending to alter economic outcomes is known as Monetary policy. Fiscal policy. Incomes policy. Foreign trade policy. Fiscal policy is the use of government taxes and spending to alter macroeconomic outcomes. Which of the following is an appropriate fiscal policy prescription for the government to follow? Deficit reduction during a recession. Deficit reduction when there is excess AD. Deficit expansion in an inflationary gap. Deficit reduction during a war. The appropriate policy when the economy is experiencing an inflationary gap is fiscal restraint. Restrictive policy such as tax hikes or spending cuts will cause the budget to tend toward a surplus increase or deficit reduction.

2 2 of 12 11/12/2013 9:31 AM With greater deficit spending, ceteris paribus, Aggregate spending should fall. Any inflationary gap will become larger. There are greater leakages. There is inadequate information to tell what happens to aggregate spending. Deficit spending occurs when government expenditures exceed tax revenues. Increased government spending or tax cuts, which create the need for deficit spending, will increase aggregate demand. If an inflationary gap exists, the increase in AD will cause it to get larger. If full-employment output exceeds equilibrium output, greater deficit spending will result in a Smaller recessionary gap. Smaller inflationary gap. Larger recessionary gap. None of the choices are correct. Deficit spending occurs when government expenditures exceed tax revenues. Increased government spending or tax cuts, which create the need for deficit spending, will increase the aggregate demand. If a recessionary gap exists (equilibrium output is less than full-employment output), the increase in AD will cause the gap to get smaller. A budget surplus is An excess of government spending over government revenues in a given time period. An excess of government revenues over government expenditures in a given time period. Used only in time of war. None of the choices are correct. A budget surplus is the excess of government revenues over government expenditures in a given time period.

3 3 of 12 11/12/2013 9:31 AM Which of the following is true about the U.S. federal government budget for the year 1998? The U.S. Constitution was amended to require a balanced federal budget. The federal budget deficit was the largest in history. Federal government receipts were greater than federal government spending for the first time in more than 25 years. Federal government outlays were greater than federal government receipts for the first time in more than 25 years. Budget deficits are overwhelmingly the rule, not the exception. A budget surplus was achieved in only four years ( ) since In order to reduce the U.S. debt, The government must use deficit spending. The government should spend less than it collects in tax revenues. There will be a transfer of revenue from bondholders to taxpayers. Foreign governments must lend more money to the U.S. government. The only way to stop the growth of the national debt is to eliminate the budget deficits that create debt. To reduce the debt, budget surpluses would be needed. Learning Objective: How the national debt has accumulated. Which of the following is an argument against balancing the federal budget? The federal government interferes with the economy too much. An increase in government spending and taxes by the same amount does not affect income. Doing so may prevent the government from pulling the economy out of recession. None of the choices are correct. Balancing the budget during a recession would require a tax increase and/or government expenditure cuts. These policies would decrease AD, thereby causing the economy to worsen.

4 4 of 12 11/12/2013 9:31 AM In order to maintain a balanced budget every year, during a recession the government would have to Decrease the money supply. Increase the money supply. Decrease spending or increase taxes or both. Increase spending or decrease taxes or both. During a recession, tax receipts automatically decrease while government expenditures automatically increase. Therefore, in order to maintain a balanced budget, the government would have to increase taxes and/or cut government expenditures. Which of the following is not an automatic stabilizer? Progressive income taxes. Unemployment benefits. Welfare payments. Defense spending. Defense spending is not determined by past legislative or executive commitments, so it is discretionary. Each automatic stabilizer value changes with economic conditions. Income taxes, unemployment benefits, and welfare payments will change with changes in GDP. Automatic stabilizers tend to stabilize the level of economic activity because they Are changed quickly by Congress. Increase the size of the multiplier. Increase spending during recessions and reduce spending during inflationary periods. Control the rate of change in prices. Automatic stabilizers are federal expenditure or revenue items that automatically respond countercyclically to changes in national income. In other words, during a recession tax revenues will decrease and entitlement spending will increase without government intervention. During an expansion, tax revenues and will decline and expenditures will decrease automatically.

5 5 of 12 11/12/2013 9:31 AM Which of the following is most likely to increase a federal budget surplus? A higher inflation rate and a higher unemployment rate. A higher inflation rate and a lower unemployment rate. A lower inflation rate and a higher unemployment rate. A lower inflation rate and a lower unemployment rate. The government budget will tend toward a surplus during economic growth or an inflationary gap. Higher inflation and lower unemployment indicate that the economy is growing (AD is increasing). Also, higher inflation causing bracket creep allows the government to pay off old debt with cheaper dollars. 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? Automatic stabilizers and autonomous consumption. C, I, G, X, and M. Structural and cyclical Frictional and seasonal The budget deficit includes both cyclical and structural components. Changes in the structural component result from policy changes; changes in the cyclical component result from changes in the economy. The structural deficit represents Federal revenues minus federal expenditures at full employment under current fiscal policy. Federal revenues minus expenditures under current fiscal policy at current output. A measure of the size of recessionary or inflationary gaps. The difference between expenditures at full employment and expenditures at cyclical unemployment. The structural portion of the deficit is equal to federal revenues minus expenditures at full employment under prevailing fiscal policy.

6 6 of 12 11/12/2013 9:31 AM The largest percentage of U.S. national debt to GDP occurred during The Civil War. World War I. World War II. The Great Depression. 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 total deficit increases. The structural deficit increases. The cyclical deficit increases. The structural deficit decreases. The cyclical portion of the budget balance reflects the impact of the business cycle on federal tax revenues and spending. The structural deficit reflects fiscal policy decisions. A decrease in private sector borrowing and spending caused by increased government borrowing is Crowding in. Crowding out. Fiscal stimulus. The GDP gap. Crowding out is a reduction in private sector borrowing (and spending) caused by increased government borrowing. Learning Objective: How and when crowding out occurs.

7 7 of 12 11/12/2013 9:31 AM Crowding out is most likely to occur when the federal government Runs a surplus and pays off part of the debt. Has a balanced budget and refinances a portion of the debt that matures. Runs a deficit and raises taxes to generate more revenue. Runs a deficit and sells bonds to make up the difference. Crowding out is a reduction in private sector borrowing (and spending) caused by increased government borrowing. Increased borrowing occurs when the government runs a budget deficit. Selling bonds is how the government borrows money. Learning Objective: How and when crowding out occurs. If there was a federal budget surplus and the government decided to either increase spending or decrease taxes, The budget surplus would get smaller. The budget surplus would get larger. The budget surplus would remain unchanged. None of the choices are correct. There are four potential uses for a budget surplus: spend it on goods and services, cut taxes, increase income transfers, or pay off old debt. The first three options effectively wipe out the surplus by changing budget outlays or receipts. An increase in private sector borrowing and spending caused by decreased government borrowing is known as Crowding out. Crowding in. Crowding debt. Debt reduction. Crowding in is an increase in private sector borrowing (and spending) caused by decreased government borrowing. Learning Objective: How and when crowding out occurs.

8 8 of 12 11/12/2013 9:31 AM The U.S. government incurred a national debt for the first time during World War II. Ronald Reagan's presidency. The Revolutionary War. The Great Depression. The United States started out in debt. The Continental Congress needed to borrow money in 1777 to continue fighting the Revolutionary War. Learning Objective: How the national debt has accumulated. The national debt Is paid off each fiscal year when the debt is refinanced. Will never be paid off in any given year, but it will be entirely paid off when it is refinanced over a number of years. Will be paid off when the budget is finally balanced. Equals the dollar amount of outstanding U.S. Treasury bonds. The national debt is the accumulated debt of the federal government, the total stock of all outstanding bonds. Learning Objective: How the national debt has accumulated. If debt-financed less productive government spending crowds out more productive private investment, future generations will bear All of the burden of the debt due to higher taxes. Zero burden as a result of the debt. Some of the burden of the debt due to lower productive capacity. A portion of the burden of the debt relative to the population size. Although future generations may benefit from current government spending, they may also be adversely affected by today's opportunity costs. Of particular concern is the possibility that government deficits might crowd out more productive private investment. Investment is essential to enlarging our production possibilities and attaining higher living standards in the future. If federal deficits and debt-servicing requirements crowd out private investment, the rate of economic growth will slow, leaving future generations with less productive capacity than they would otherwise have. Thus if debt-financed government spending crowds out more productive private investment, future generations will bear some of the debt burden. Learning Objective: What the real burden of the national debt is.

9 9 of 12 11/12/2013 9:31 AM If deficit spending does not contribute to public investment and crowds out private investment, then The rate of economic growth will decline, ceteris paribus. The current generation will bear the total burden of the debt. Future productive capacity will be enhanced. The opportunity cost of the debt will be minimized. Government deficits might crowd out private investment. Investment is essential to enlarging our production possibilities and attaining higher living standards in the future. If federal deficits and debt-servicing requirements crowd out private investment, the rate of economic growth will slow, leaving future generations with less productive capacity than they would otherwise have. Learning Objective: What the real burden of the national debt is. Which of the following required all new federal government spending initiatives to be offset with increased taxes or cutbacks in other programs? Balanced Budget and Emergency Deficit Control Act of Gramm-Rudman-Hollings Act of The Budget Enforcement Act of The Federal Deficit Act of The Budget Enforcement Act (BEA) of 1990 laid out a plan for Congress to close the structural deficit by limiting discretionary spending or raising taxes. The BEA set separate limits on defense spending, discretionary domestic spending, and international spending. It also required that any new spending initiative be offset with increased taxes or cutbacks in other programs a process called "pay as you go" or simply "paygo."

10 10 of 12 11/12/2013 9:31 AM Refer to Figure The concept of crowding in suggests that a government budget surplus would move the economy from point A to point C. C to point A. E to point F. B to point A. If the government budget is in surplus, interest rates may decrease, causing crowding in an increase in private sector borrowing (and spending) caused by decreased government borrowing. In this case, the increased private sector borrowing will move the economy from point A to point C. Learning Objective: How and when crowding out occurs.

11 11 of 12 11/12/2013 9:31 AM In the In the News article in the text titled "Fiscal Policy in the Great Depression," President Hoover's prescription in 1932 was for cutbacks in government spending and higher taxes. He was effectively Targeting the goal of full employment rather than reduction of inflation. Decreasing the level of AD. Applying the Keynesian prescription for handling a depression. Following the classical approach of laissez faire. From 1931 to 1933, the structural deficit decreased from $4.5 billion to a $2 billion surplus. This fiscal restraint reduced aggregate demand and deepened the Great Depression. Which of the following is true regarding the "American Recovery and Reinvestment Plan"? The massive 2009 stimulus package was designed to jump-start the recession-bound economy. Critics argued that the massive deficits generated by President Obama's plan would undermine America's financial stability. Critics argued that in order to pay the deficits created by the plan, the government would be forced to raise taxes and cut spending, which would reverse the boost from the stimulus. All of the choices are correct. President Obama's 2009 stimulus package was designed to jump-start the recession-bound economy. Critics argued about both the content and size of that package and said it would ultimately do more harm than good. Those critics asserted that the massive deficits generated by Obama's "American Recovery and Reinvestment Act" would undermine America's financial stability because eventually taxes would have to be raised or government expenditures would need to be cut to pay off the deficits incurred.

12 12 of 12 11/12/2013 9:31 AM How did the impact of President Obama's fiscal stimulus in 2009 compare to the impact of President Bush's tax cuts and increased defense spending on the structural deficit? President Obama's effect on the structural budget deficit was much lower than President Bush's. President Obama's effect on the structural budget deficit was much higher than President Bush's. President Obama and President Bush's impacts on the structural budget deficit were about equal. The impact on the structural budget was not measured only the cyclical impact of these policies. A structural deficit or surplus comes from fiscal policy at full employment from the economy's influence away from full employment., and a cyclical deficit or surplus comes According to the In the News article in the text titled "Deficit Outlook Darkens," the Congressional Budget Office (CBO) predicts that by 2017 the national debt will be $15 trillion. $18 trillion. $21 trillion. $28 trillion. According to the article and certain assumptions, the Congressional Budget Office (CBO) predicts that by 2017 the national debt will be $21 trillion. Learning Objective: How the national debt has accumulated.

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