ECON 201 Chapter Notes - Chapter 13: Output Gap, Aggregate Demand, Government Spending

34 views6 pages

coralguinea-pig936

11 Oct 2018

School

Department

Economics

Course

ECON 201

Professor

Dennis O'Dea

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Taxes, purchases of goods and services, government transfers, and borrowing. In the us, taxes are collected at the national level by the federal government; towns. Government spending happens by either purchasing goods and services or by. Government spending on transfer payments is accounts by: Medicare: covers the cost of healthcare for those over 65. Medicaid: covers much of the cost of health care for those with low inco. Social insurance: government programs that are intended to protect families a. Recall gdp = c + i + g + x - im. Government spending effects trends in consumer and investment spending. Expansionary fiscal policy: fiscal policy that increases aggregate demand (reces. An increase in government purchases of goods and services. Contractionary fiscal policy: fiscal policy that reduces aggregate demand (infla. Reduction in government purchases of goods and services. False: government spending crowds out private spending only wh. Government borrowing always crows out private investment spending.

Related Questions

Dems, GOP talk up deficit reduction, but don't act

WASHINGTON (AP) â Liberals' loud objections to White House proposals for slowing the growth of huge social programs make it clear that neither political party puts a high priority on reducing the deficit, despite much talk to the contrary.

For years, House Republicans have adamantly refused to raise income taxes, even though U.S. taxes are historically low, and the Bush-era tax cuts were a major cause of the current deficit.

And now, top Democrats are staunchly opposing changes to Medicare and Social Security benefits, despite studies showing the programs' financial paths are unsustainable.

Unless something gives, it's hard to see what will produce the significant compromises needed to tame the federal debt, which is nearing $17 trillion.

"There's not much of an appetite for deficit reduction," said Bob Bixby of the Concord Coalition, which pushes for "responsible fiscal policy."

There might be a few small steps this year, he said, when the government again needs to raise its borrowing limit. But a "grand bargain" involving significant spending cuts and revenue increases seems unlikely, Bixby said.

He added, "It's a little depressing to hear the reactions to the president's budget, from both sides."

There was nothing surprising about Republican denunciations of Obama's proposed tax increases, which he wants to combine with spending cuts to reduce the deficit.

The newer wrinkle was the left's sharp criticism of his proposals to slow the growth in Medicare and Social Security benefits, provided Republicans agree to new revenues. Obama has offered Republicans such a deal before. But this month's budget proposal gave it a new imprimatur.

The group MoveOn.org said Wednesday that supporters "who are outraged at President Obama's proposal to cut Social Security benefits will protest and deliver petitions" this week.

Sen. Bernie Sanders, a liberal independent from Vermont, is leading a similar petition drive, opposing "any benefit cuts to Social Security, Medicare or Medicaid." The deficit, his letter says, "was primarily caused during the Bush years by two unpaid-for wars, huge tax breaks for the rich and a prescription drug program" for Medicare, funded through borrowing. He suggests that higher taxes on the wealthy are the fairest way to tackle the deficit.

Democrats cite several reasons to raise taxes on high-income households. Obama campaigned for such tax increases in 2008 and 2012 but accomplished them only partially with the "fiscal cliff" resolution of Jan. 1.

Major tax cuts in 2001 and 2003 played big roles in turning a federal budget surplus into soaring deficits, according to research by the Congressional Budget Office and others. And by many measures, the U.S. tax burden in near historic lows.

Households earning roughly the national median income paid, on average, 11.1 percent of their income in total federal taxes in 2009, the most recent year for such data. That's the lowest level in more than 30 years, the CBO says.

Nonetheless, House Republicans have placed their highest priority on refusing to raise income tax rates, effectively ranking it above all other goals.

"The president got his tax hikes on Jan. 1," House Speaker John Boehner, R-Ohio, is fond of saying. It's a reference to the $620 billion in new revenues, over 10 years, that Republicans were unable to stop because of the "fiscal cliff" law, resolved on New Year's Day.

If it's easy to make a case for higher revenues, the same is true for slowing the growth of Social Security and Medicare benefits. For decades, studies have warned of approaching trouble in these popular but costly programs, as health care costs rise and baby boomers begin to retire.

"Both Medicare and Social Security cannot sustain projected long-run program costs under currently scheduled financing, and legislative modifications are necessary to avoid disruptive consequences for beneficiaries and taxpayers," the Social Security Administration says, summarizing findings by the two programs' trustees.

"The early detection light has been going on for a while, and there has been a failure to act," Social Security trustee Charles P. Blahous recently told a House panel. If lawmakers are to preserve the programs for future retirees, he said, they will have to accept much more "political pain" than officials endured during a 1983 overhaul that included "several extremely controversial measures."

Obama has proposed an often-discussed step, which deals with government accounting in general, not just entitlement programs. If Congress agrees to higher tax revenues, the president said, he would back a slower growth calculation for cost-of-living increases for Social Security benefits, plus higher Medicare premiums for higher-income seniors.

Interest groups have criticized both ideas. AARP calls the slower cost-of-living formula a "harmful change," and urges seniors to oppose it.

American voters can largely blame themselves when Congress is more talk than action on deficit reduction. Americans routinely say they want a smaller federal debt, but not at the cost of programs they hold dear â including Social Security and Medicare.

A CBS News poll in March found that most Americans want to cut spending and raise taxes to reduce the deficit. But 4 in 5 oppose cuts to Social Security or Medicare. And two-thirds are unwilling to have their own taxes raised in the name of deficit reduction.

When Pew Research asked which was more important â reducing the national debt or keeping Social Security and Medicare benefits as they are now â the public sided with safeguarding the benefits programs, 53 percent to 36 percent.

The deficit-spending partisanship continued Wednesday. On a party-line vote, House Ways and Means Committee Republicans passed a bill to protect Social Security recipients and investors in Treasury bonds if the government hits its borrowing limit and can't pay all its bills later this year. Democrats say if the federal government starts reneging on any obligations â even if it pays bondholders â financial markets will lose faith and the economy will tank.

Some Democrats fear a lose-lose situation if they support Obama's proposals. First, they could be attacked from the left for tweaking the programs that many Democrats see as their party's greatest legacy. And second, Republicans might accuse them of "raiding Medicare" in next year's congressional elections. That battle cry proved effective in 2010 after Obama's health care overhaul bill was passed.

Democrats call such tactics shamelessly hypocritical. Republicans, they note, have long called for reining in entitlement spending.

Boehner rebuked a top GOP campaign figure for hinting at a renewal of the "raiding Medicare" attacks. But Reince Priebus, the national Republican Party chairman, seemed eager to revive the question of whether Democratic trims to Medicare's costs amount to an unfair cut in benefits.

9. Read the AP article âDems, GOP talk up deficit reduction, but don't act (Links to an external site.)â by C. Babington (Apr25â13).

a. What are the two basic ways of shrinking a budget deficit?

b. Which of your answers above are Republicans vehemently against? What are the potential negative economic effects of implementing this basic policy?

c. Which of your answers above are Democrats strongly opposed to? What are the potential negative economic effects of implementing this basic policy?

lavenderpug75

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.

1. The primary tool used by supply-side economists to eliminate macroeconomic problems is

A. the discount rate.

B. corporate tax rates.

C. government spending.

D. open market operations.

E. the reserve requirement.

2. When the Federal Reserve System buys government securities on the open market,

A. the money supply will decrease.

B. excess reserves at commercial banks will decrease.

C. excess reserves at commercial banks will increase.

D. interest rates will increase

3. One of the advantages of automatic stabilizers over discretionary fiscal policy is that automatic stabilizers

A. has a greater multiplier effect than discretionary policy.

B. is not subject to the time lag problems of discretionary policy.

C. does not produce a deficit during recessions as a discretionary policy does.

D. makes the actual budget a better reflection of the condition of the economy than the full-employment budget.

4. "I have promised to do everything in my power to reduce the federal deficit. That means reducing federal expenditures and, if necessary, increasing taxes. Under present conditions of full employment and steady prices, we can afford to bear the burden of this debt (i.e., pay off the debt) now instead of passing it on to our children and grandchildren."

If the policies of the Senator quoted above were adopted, what effects would be expected while these policies were being implemented?

A. higher inflation

B. increases imports

C. higher rates of economic growth

D. increased unemployment and idle capacity

5. An inflationary gap can be reduced or completely closed by

A. decreasing taxes while leaving government spending on goods and services unchanged.

B. decreasing government spending on goods and services while leaving taxes unchanged.

C. increasing government spending on goods and services while leaving taxes unchanged.

D. increasing both government spending on goods and services and taxes by the same amount.

6. Compared to fiscal policy, an advantage of monetary policy is its

A. greater flexibility.

B. highly selective impact on segments of the economy.

C. ability to eliminate cost-push inflation.

D. need for approval by Congress.

E. need for approval by the President.

7. An increase in government spending on goods and services which causes a budget deficit to exist

A. is always inflationary.

B. is more inflationary than equal increases in private spending.

C. is usually not inflationary when the economy is operating at its full-employment level of output.

D. will not necessarily cause serious inflation as long as there are unemployed resources in the economy.

8. Some analysts believe the tax cuts enacted during the President H.W. Bush administration represented a supply-side economic policy rather than a Keynesian fiscal policy because

A. the tax cuts were accompanied by decreases in interest rates.

B. the tax cuts were accompanied by increases in government spending.

C. the tax cuts were primarily aimed at upper-income groups and businesses.

D. the tax cuts were primarily aimed at middle income and lower-income groups.

9. When the federal government is stabilizing the economy by increasing taxes, monetary authorities should

A. take actions to decrease interest rates.

B. increase the supply of money.

C. buy government securities in the open market.

D. follow an expansionary money policy.

E. follow a contractionary money policy.

10. Suppose a commercial bank has demand deposits (checking accounts) of $400,000, actual reserves of $170,000, and a reserve requirement of 20%. This single commercial bank can lend a maximum of ______ and the banking system can increase loans by a maximum of ______

A. $90,000 and $450,000.
B. $90,000 and $360,000.
C. $90,000 and $170,000.
D. $170,000 and $450,000.

E. both can lend an unlimited amount.

11. Which of the following would most likely result if the federal government increased its spending without changing tax revenues during a period of full employment?

A. inflation

B. a recession

C. lower interest rates

D. a larger net exports deficit

12. Fiscal policy that emphasizes cutting taxes as a means of improving incentives to work, and invest would be characterized in aggregate demand - aggregate supply framework primarily a shift

A. left in the aggregate demand curve.

B. left in the aggregate supply curve.

C. right in the aggregate supply curve.

D. no shift in either the aggregate demand curve or the aggregate supply curve.

13. Which of the following will result in the greatest increase in aggregate expenditures/demand?

A. A $100 decrease in personal income taxes

B. A $100 increase in personal income taxes

C. A $100 increase in government expenditures

D. A $100 increase in government expenditures which is accompanied by a $100 increase in personal income taxes

E. Both A and C will have the same effect on aggregate expenditures

14. You are given the following information about aggregate demand for an economy: (1)consumption = $600 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $720 billion, then what combination of actions would be most consistent to achieve full employment and stable prices?

A. an increase in government spending and taxes

B. decrease government spending and taxes

C. decrease government spending and increase taxes

D. increase government spending and decrease taxes

15. Advocates of fiscal policy agree that discretionary fiscal policy will stabilize the business cycle most when the federal government

A. continuously incurs budget deficits.

B. continuously runs budget surpluses.

C. balances its budget every year.

D. incurs budget deficits during recessions and budget surpluses during demand-pull inflations.

E. incurs budget surpluses during recessions and budget deficits during demand-pull inflations.

16. Discretionary fiscal policy that increases the government budget deficit has the same effect on equilibrium as

A. an increase in personal saving.

B. an increase in business investment.

C. a decrease in government spending.

D. a decrease in personal consumption expenditures

pearseal757

ECON 201 Chapter Notes - Chapter 13: Output Gap, Aggregate Demand, Government Spending

Document Summary

Get access

Related Documents

ECON 201 Chapter Notes - Chapter 13: Aggregate Demand, Dividend Tax, Business Cycle

ECON 201 Lecture Notes - Lecture 20: Balanced Budget, Output Gap, Keynesian Cross

ECON 201 Chapter Notes - Chapter 7: Disposable And Discretionary Income, National Accounts, Human Capital

Related Questions