Chapter 33

Which of the following would help a government reduce an inflationary output gap? a. Raising taxes. b. Lowering taxes. c. Increasing government spending. d. Decreasing government spending.

The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand but also at the same time raising taxes to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is: a. The worst possible combination of tax and expenditure changes. b. The best possible combination of tax and expenditure changes. c. A mediocre and contradictory combination of tax and expenditure changes. d. None of the above.

During the recession of \(2007-2009,\) the U.S. federal government's tax collections fell from about \(2.6\) trillion dollars down to about \(2.1\) trillion dollars while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers? a. Yes. b. No.

Last year, while an economy was in a recession, government spending was \(595\) billion dollars and government revenue was 505 billion dollars. Economists estimate that if the economy had been at its full-employment level of GDP last year, government spending would have been \(555\) billion dollars and government revenue would have been \(550\) billion dollars. Which of the following statements about this government's fiscal situation are true? a. The government has a non-cyclically adjusted budget deficit of \(595\) billion dollars. b. The government has a non-cyclically adjusted budget deficit of \(90\) billion dollars. c. The government has a non-cyclically adjusted budget surplus of \(90\) billion dollars. d. The government has a cyclically adjusted budget deficit of \(555\) billion dollars. e. The government has a cyclically adjusted budget deficit of \(5\) billion dollars. f. The government has a cyclically adjusted budget surplus of \(5\) billion dollars.

Label each of the following scenarios in which there are problems enacting and applying fiscal policy as being an example of either recognition lag, administrative lag, or operational lag. a. To fight a recession, Congress has passed a bill to increase infrastructure spending-but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin. b. Distracted by a war that is going badly, politicians take no notice until inflation reaches 8 percent. c. A sudden recession is recognized by politicians, but it takes many months of political deal making before a stimulus bill is finally approved. d. To fight a recession, the president orders federal agencies to get rid of petty regulations that burden private businesses but the federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.

In January, the interest rate is 5 percent and firms borrow \(50\) billion dollars per month for investment projects. In February, the federal government doubles its monthly borrowing from \(25\) billion dollars to \(50\) billion dollars. That drives the interest rate up to 7 percent. As a result, firms cut back their borrowing to only \(30\) billion dollars per month. Which of the following is true? a. There is no crowding-out effect because the government's increase in borrowing exceeds firms' decrease in borrowing. b. There is a crowding-out effect of \(20\) billion dollars. c. There is no crowding-out effect because both the government and firms are still borrowing a lot. d. There is a crowding-out effect of \(25\) billion dollars.