Chapter 13: Types of Fiscal Policy (page 264)
What is the relationship between the multiplier and the AD component of government spending?
Every component has its own respective multiplier.
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Refer back to the table in Figure 12.7 in the previous chapter. Suppose that aggregate demand increases such that the amount of real output demanded rises by \(7 billion at each price level. By what percentage will the price level increase? Will this inflation be demand-pull inflation, or will it be cost-push inflation? If potential real GDP (that is, full-employment GDP) is \)510 billion, what will be the size of the positive GDP gap after the change in aggregate demand? If government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it?
| Real Output Demanded (Billions) | Price Level (Index Number) | Real Output Supplied (Billions) |
| \(506 | 108 | \)513 |
| 508 | 104 | 512 |
| 510 | 100 | 510 |
| 512 | 96 | 507 |
| 514 | 92 | 502 |
In January, the interest rate is 5 percent and firms borrow \(50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from \)25 billion to \(50 billion, driving the interest rate up to 7 percent. As a result, firms cut back their borrowing to only \)30 billion per month. Which of the following is true?
There is no crowding-out effect because the government’s increase in borrowing exceeds firms’ decrease in borrowing.
There is a crowding-out effect of \(20 billion.
There is no crowding-out effect because both the government and firms are still borrowing a lot.
There is a crowding-out effect of \)25 billion.
How do economists distinguish between the absolute and relative sizes of the public debt? Why is the distinction important? Distinguish between refinancing the debt and retiring the debt. How does an internally held public debt differ from an externally held public debt? Contrast the effects of retiring an internally held debt and retiring an externally held debt.
During the recession of 2007–2009, the U.S. federal government’s tax collections fell from about \(2.6 trillion down to about \)2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?
Yes
No
What happens between the public and private sectors during a "crowding out" effect?
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