Macro 2006 Exam 3 (1 Of 3)

Front 1

President Bush is successful in passing a $5 billion tax cut. Assume that taxes arefixed, the economy is closed, and the marginal propensity to consume is 0.75. Whathappens to equilibrium GDP?

Back 1

There is a $15 billion increase in equilibrium GDP.

Front 2

The multiplier effect is the series of ________ increases in ________ expenditures thatresult from an initial increase in ________ expenditures.

Back 2

induced; consumption; autonomous

Front 3

If the federal budget has an actual budget deficit of $100 billion and a cyclicallyadjusted budget deficit of $75 billion, then the economy.

Back 3

must be below potential real GDP.

Front 4

Tax reduction and simplification should ________ long-run aggregate supply and________ aggregate demand.

Back 4

increase; increase

Front 5

Fiscal policy actions that are intended to have long-run effects on real GDP attemptto increase ________ through changing ________.

Back 5

aggregate supply; taxes

Front 6

Double taxation refers to

Back 6

corporations paying taxes on profits and individuals paying taxes on dividends.

Front 7

If we include consideration of potential effects of a proposed tax reduction andsimplification on the labor supply, we would expect crowding out of investmentand net exports brought about by the tax cut to be

Back 7

less than it would be without the supply-side effects.

Front 8

If tax reduction and simplification are effective, then

Back 8

saving and investment in new capital will increase.

Front 9

A recent study by Edward Prescott found that the ________ marginal tax rates in theUnited States relative to Europe resulted in a ________ quantity of labor supplied inthe United States.

Back 9

lower; larger

Front 10

Reducing the marginal tax rate on income will

Back 10

reduce the tax wedge faced by workers and increase labor supplied.

Front 11

Borrowing to pay for long-lived capital expenditures makes sense as

Back 11

the benefits are received over many years so the burden of paying for them should be spread over many years.

Front 12

Government deficits tend to increase during

Back 12

periods of war and recession.

Front 13

If the federal government's expenditures are less than its tax revenues, then

Back 13

a budget surplus results.

Front 14

The total value of U.S. Treasury bonds outstanding equals

Back 14

the federal government debt.

Front 15

Crowding out, following an increase in government spending, results from (theexchange rate is the foreign exchange price of the domestic currency)

Back 15

higher interest rates and a higher exchange rate.

Front 16

Poorly timed discretionary policy can do more harm than good. Getting the timingright with fiscal policy is generally

Back 16

more difficult than with monetary policy.

Front 17

If policy makers implement an expansionary fiscal policy but do not take intoaccount the potential for crowding out, the new equilibrium level of GDP is likely to

Back 17

be below potential GDP.

Front 18

Recent research shows that during recessions, temporarily unemployed people mayexperience improving

Back 18

physical health.

Front 19

Increases in government spending result in ________ in the short run, andpermanent increases in government spending result in ________ in the long run.

Back 19

partial crowding out; complete crowding out

Front 20

Crowding out will be greater

Back 20

the more sensitive investment spending is to changes in the interest rate.

Front 21

A cut in tax rates effects equilibrium real GDP through two channels: ________disposable income and consumer spending, and ________ the size of the multipliereffect.

Back 21

increasing; increasing

Front 22

Cutting taxes

Back 22

will raise disposable income and raise spending.

Front 23

The tax multiplier

Back 23

is negative.

Front 24

An equal increase in government purchases and taxes will cause

Back 24

an increase in real GDP.

Front 25

Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congressand the president plan to use fiscal policy to restore the economy to potential realGDP. Assuming a constant price level, Congress and the president would need toincrease government purchases by

Back 25

less than $500 billion

Front 26

An increase in government purchases of $200 billion will shift the aggregate demandcurve to the right by

Back 26

more than $200 billion.

Front 27

In an open economy, the government purchases multiplier will be larger the

Back 27

All of the above are correct.

Front 28

Calculate the government purchases multiplier if the marginal propensity toconsume equals 0.8, the tax rate is 0.1, and the marginal propensity to import equals0.2.

Back 28

2.1

Front 29

What is the government purchases multiplier if the tax rate is 0.1 and the marginalpropensity to consume is 0.9? Assume the economy is closed.

Back 29

5.3

Front 30

Assume a closed economy, that taxes are fixed, and the marginal propensity toconsume is equal to 0.8. What is the government spending multiplier?

Back 30

5

Front 31

In an open economy, the government purchases multiplier will be

Back 31

smaller as the marginal propensity to import increases.

Front 32

Suppose that Congress allocates $1 billion to clean up after the hurricanes of 2005. Italso raises taxes by $1 billion to keep the deficit from growing. If the marginalpropensity to consume is 0.9, what is the effect on equilibrium GDP?

Back 32

GDP increases by $1 billion.

Front 33

Back 33

increase government transfer payments.

Front 34

Back 34

increase taxes

Front 35

Back 35

increase government purchases

Front 36

Back 36

real GDP and the inflation rate

Front 37

Back 37

increase income taxes

Front 38

Back 38

increase government spending

Front 39

Back 39

a decrease in income taxes

Front 40

Back 40

B) greater than