ECON 1115 Study Guide - Midterm Guide: Aggregate Demand, Balanced Budget Amendment, Refinancing

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sangriagoat944

3 May 2014

School

Northeastern University

Department

Economics

Course

ECON 1115

Professor

Peter Simon

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Document Summary

For the same amount initial change, the tax multiplier is a bit smaller than the government spending multiplier, since, in the tax equation, change in tax has to times the mpc which makes the total number smaller. Stabilizer and fiscal policy: tax system: progressive tax system, regressive tax system. Works better in inflation than in recession because in recession some people do not work at all: government programs: social security, unemployed benefit, welfare system, medicaid, medicare. Helps better in recession than in inflation: deficits and national debt, deficits: yearly difference between tax revenue and government. Taxation: the federal government has the constitutional authority to levy and collect taxes. A tax increase is a government option for gaining sufficient revenue to pay interest and principle on public debt: cost of debt, crowding-out effect. When investment goes down, ad , so, it offsets some not all effects of initial government spending.

Related Questions

which of the following are examples of discretionary fiscal policy

a. The government provides stimulus funds to repair roads and bridges to increase spending in the economy.

b. The president and Congress reduce tax rates to increase the amount of investment spending.

c. Additional taxes are collected as the economy experiences an increase in income resulting from economic growth.

d. The government spends more on the military to provide assistance to England after a natural disaster.

e. A state government borrows money to finance the building of a new bridge.

f. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate.

champagnellama23

5 Multiple choice questions... please answer all of them.

15.

The accumulation of years of spending more money than is collected in revenues over several years creates a budget (5 points)

	debt
	deficit
	surplus
	reversal

16.

How does the U.S. government promote economic growth? (5 points)

	By decreasing taxes and decreasing spending
	By decreasing taxes and increasing spending
	By increasing taxes and decreasing spending
	By increasing taxes and increasing spending

17.

The country of Lilliput has low unemployment and high consumer spending, and small businesses are thriving. However, prices are starting to rise throughout the economy. What should Lilliput's government do to prevent inflation from happening? (5 points)

	Lower the income tax, which gives citizens less money to spend, and buy services from civilian-owned businesses, which creates more jobs.
	Lower the income tax, which gives citizens more money to spend, and buy more services from civilian-owned businesses, which creates more jobs.
	Raise the income tax, which gives citizens less money to spend, and stop buying services from civilian-owned businesses, which eliminates jobs.
	Raise the income tax, which gives citizens less money to spend, and buy more services from civilian-owned businesses, which creates more jobs.

18.

The government increases taxes. What might be a reason for this change in fiscal policy? (5 points)

	A deficit due to improving nationwide public transportation
	A deficit due to more monies flowing in from investors
	A surplus due to greater amounts of income from exports
	A surplus due to more government spending on building roads

19.

Which of these is required to balance the budget for the year? (5 points)

	Revenue equal to spending
	Revenue greater than spending
	Revenue less than spending
	No national debt

1.Ceteris paribus, if the U.S. federal government reduces its budget deficit which of the following will be observed?

Answer

	a.	The aggregate demand curve will shift to the right.
	b.	The economy will always approach potential GDP.
	c.	The marginal propensity to consume will increase.
	d.	The average price level will increase.
	e.	The aggregate demand curve will shift to the left.

2. If the government wants to close a GDP gap, it can:

Answer

	a.	lower government spending on social security.
	b.	adopt contractionary fiscal policies to control inflation.
	c.	increase its budget deficit.
	d.	repay its borrowings.
	e.	raise both direct and indirect tax rates.

3. Suppose the short-run equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and price level. This can be accomplished by:

Answer

	a.	lowering average tax rates such that aggregate supply is increased.
	b.	increasing government spending such that aggregate expenditures are increased.
	c.	increasing transfer payments such that aggregate expenditures decline.
	d.	raising taxes and government spending by the same amount such that aggregate supply is decreased and aggregate demand is increased.
	e.	decreasing government spending such that aggregate demand is reduced.

4. A drop in investment spending caused by increased government budget deficits is referred to as:

Answer

	a.	the multiplier effect.
	b.	crowding out.
	c.	an expansionary gap.
	d.	the paradox of thrift.
	e.	the Ricardian equivalence.

5. Discretionary fiscal policy is best defined as:

Answer

	a.	the deliberate manipulation of the money supply to expand the economy.
	b.	the deliberate change in tax laws and government spending to change equilibrium income.
	c.	the policy action taken by the Congress to reduce the federal budget deficit.
	d.	the arbitrary fluctuation in tax laws and budget requirements.
	e.	the automatic change in certain fiscal instruments when real GDP changes.

6. Which of the following can be considered as an automatic stabilizer in the economy?

Answer

	a.	Money supply
	b.	Disposable income
	c.	Real exchange rate
	d.	Real interest rate
	e.	Unemployment insurance

7. Which of the following is true about automatic stabilizers?

Answer

	a.	When income rises, automatic stabilizers increase/boost spending.
	b.	Automatic stabilizers are a part of discretionary fiscal policy.
	c.	An automatic stabilizer is any program that responds to fluctuations in the business cycle in a way that moderates the effects of those fluctuations.
	d.	Any kind of trade policy adopted by the government will be considered as an automatic stabilizer.
	e.	The interest rate is an example of an automatic stabilizer.

8. Increased budget deficits

Answer

	a.	can cause interest rates to increase and hence decrease net exports
	b.	have no effect on net exports
	c.	can cause interest rates to decrease and hence increase net exports
	d.	never impose additional interest costs on the government

9. The Ricadian Equivalence implies that when financing additional government expenditures

Answer

	a.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will decrease either way.
	b.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will increase either way.
	c.	increasing borrowing is the best option
	d.	increasing current taxes is the best option

10. Assuming no effects on aggregate supply, if the government increases government spending and decreases taxes in an attempt to prevent a possible recession, aggregate demand will shift to the ____, the price level will either remain constant or ____, and the level of real GDP will ____.

Answer

	a.	right; decrease; increase
	b.	right; decrease; decrease
	c.	left; decrease; decrease
	d.	left; increase; increase
	e.	right; increase; increase

11. For a hypothetical economy, the MPS is 0.08 and the MPI is 0.17. If government spending increases by $35 and taxes increase by $35, what will be the net effect on equilibrium income?

Answer

	a.	A decrease of $35
	b.	An increase of $105
	c.	An increase of $35
	d.	A decrease of $105
	e.	A decrease of $15

12.12. The term fiscal policy refers to

Answer

	a.	the adjustment of the GDP for inflation.
	b.	the purchase and sale of U.S. government securities to regulate the money supply.
	c.	the use of government spending and taxation to influence the level of economic growth and inflation.
	d.	the use of fines to penalize unfair business practices.
	e.	a policy action by Congress to overrule unpopular budget cuts by the president.

13. If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things equal, an increase in government spending will

Answer

	a.	raise the price level and leave real GDP unchanged.
	b.	raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged.
	c.	raise both real GDP and the price level by a multiple of the initial spending increase.
	d.	have no effect on real GDP or on the price level, because all private investment will be crowded out.
	e.	lower real GDP by an amount equal to the spending increase and reduce inflation.

14. Which of the following is not a means to finance government spending?

Answer

	a.	Government subsidies
	b.	Government debt
	c.	Capital gains taxes
	d.	Personal income taxes
	e.	Money creation

15. An automatic stabilizer is

Answer

	a.	a change in government spending aimed at achieving a policy goal.
	b.	an element of fiscal policy that automatically changes in value as real GDP changes.
	c.	an element of monetary policy that automatically changes in value as real GDP changes.
	d.	a decrease in tax rates as the economy moves into a recession.
	e.	a deliberate change in taxation aimed at increasing real GDP.

16. Budget deficits tend to grow during recessions because

Answer

	a.	real GDP growth is zero, which causes neither tax receipts nor government expenditures to grow.
	b.	real GDP growth is positive, which reduces both tax receipts and transfer payments.
	c.	real GDP growth is negative, which reduces transfer payments in relation to tax receipts.
	d.	real GDP growth is negative, which reduces tax receipts in relation to government expenditures.
	e.	real GDP growth is positive, which increases tax receipts in relation to government expenditures.

ECON 1115 Study Guide - Midterm Guide: Aggregate Demand, Balanced Budget Amendment, Refinancing

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