ECO Chapter 10, 11, 12, 13

As the size of a nation's outstanding debt gets larger and larger relative to the size of the economy


Critics of Keynesian fiscal policy argue that deficit spending will not stimulate the economy, because higher interest rates will discourage consumption and investment. This argument is known as the

crowding-out effect.

If the national debt rises to the debt ceiling and there is currently a budget ________, the Congress and the President must agree to ________ the debt ceiling or else the federal government will have insufficient funds to pay its bills and will be forced to shut down.

deficit, raise

If the federal government runs a budget deficit, but the budget deficit as a percent of GDP is less than the growth rate of real output, the:

national debt will decrease as a share of GDP.

Which of the following U.S. Treasury securities represents ownership of the national debt?

All of these.

It is important to distinguish between the privately held portion of the national debt and the portion held by government agencies and the Federal Reserve System because:

only the privately held debt creates a net interest liability for the federal government.

How does inclusion of the current revenues and expenditures of the Social Security trust fund into the budget calculation affect the reported budget deficit of the federal government?

It reduces the reported deficit.

The national debt is best described as the:

sum of all federal budget deficits, past and present

When the U. S. federal government runs a budget deficit, it borrows money by selling:

Treasury bills, notes, and bonds.

External debt is that portion of the national debt:

held by foreigners.

Crowding in" refers to federal government deficits:

used for public infrastructure that will offset any decline in business investment.

Most of the U.S. national debt is owed to ____. Thus a rising national debt implies that there will be a future redistribution of income and wealth in favor of ____.

other U.S. citizens; bondholders

Crowding out" refers to federal government deficits financed by:

borrowing which increases interest rates and thereby reduces private spending.

Supply-siders feel that high levels of government spending:

cause private sector investment to decline because of crowding out.

if the fiscal year begins without a budget and Congress fails to pass continuing resolution, then:

the federal government shuts down.

The idea that a large national debt is "mortgaging the future of our children and grandchildren" is misleading because:

future generations will inherit the interest income as well as the interest obligations.

If the federal government runs a budget _______, then the national debt becomes __________.

surplus, smaller

if Congress fails to pass a budget before the fiscal year starts, then federal agencies may continue to operate only if Congress has passed a:

continuing resolution.

Each year, the president must submit a budget proposal to Congress by:


Supply-side economists argue that less government spending:

would make more investment capital available at lower rates of interest to the private sector.

He who pays a tax should receive the benefit from the expenditure financed by the tax." This statement reflects which of the following principles for a tax?


According to public choice theory, why might government policy benefit only a narrow interest group?

Both a. and b. are correct.

A tax where the percentage of income paid in taxes is the same regardless of the size of the income is a:

proportional tax.

Cost-benefit principles can be applied to the decision of:

all of these.

Generally, most economists feel that a sales tax is:


People who often create benefits for the minority and impose the cost on the majority are called:

special-interest groups.

A tax is regressive if it collects a:

smaller fraction of income as income rises.

It would be an undue hardship to require people whose income is below $15,000 per year to pay income taxes." This statement reflects which of the following principles for a tax?


According to the shortsightedness effect, politicians tend to favor projects with:

short-run benefits and long-run costs.

Consider two people, Sandy Smith, who earns $25,000, and Gary Carver, who earns $50,000. If the government has decided to tax everyone's first $25,000 at 20 percent and everyone's second $25,000 at 40 percent, then Gary pays:

$15,000 in taxes and Sandy pays $5,000 in taxes.

A progressive tax means the percentage of income paid as taxes:

increases as income increases.

If a person is concerned that an additional $1,000 income will move him/her into a new tax bracket, that person is worried about the:

marginal tax rate.

The benefits-received principle of taxation is most evident in:

excise taxes on gasoline.

A tax is structured so that the tax as a percentage of income declines as the level of income increases is called a(n

flat tax.

If the MPC = .75, the spending multiplier is:


According to supply-side fiscal policy, reducing tax rates on wages and profits will:

reduce both unemployment and inflation.

combat a recession, Keynesian fiscal policy recommends:

an increase in government spending.

An increase in the marginal propensity to consume (MPC) leads to a increase in the spending multiplier.


As the marginal propensity to consume (MPC) increases, the spending multiplier:


According to the Laffer curve, when the tax rate is 100 percent, tax revenue will be


An expansionary fiscal policy may include:

All of these.

Assume the marginal propensity to consume (MPC) is 0.75 and the economy is in recession with real GDP $1 trillion below full-employment real GDP. To achieve full employment, aggregate demand (AD) must be increased $2 trillion. Following discretionary fiscal policy, government spending should be increased:

$0.5 trillion.

If the MPC is 0.80, and if the goal is to increase real GDP by $200 million, then by how much would government spending have to change to generate this increase in real GDP?

40 million.

Assume that an economy's real GDP multiplier is 4. If this economy is in equilibrium at $2,000 billion, then which one of the following actions will bring it to a full-employment equilibrium of $1,500 billion?

$125 billion spending cut.

If the marginal propensity to consume (MPC) is 0.80, and if policy makers wish to increase real GDP $200 billion, then by how much would they have to change taxes?

-$50 million.

Assume the marginal propensity to consume (MPC) is 0.80 and the government cuts taxes by $100 billion. The aggregate demand curve will shift to the:

right by $400 billion.

If the economy was about to enter an inflationary boom, which of the following would be the most appropriate policy?

A tax increase.

A decrease in real GDP would affect the U.S. economy by:

cutting tax revenues and raising government expenditures.

If the MPC = 1, the spending multiplier is:


tax multiplier equal to -4.30 would imply that a $100 tax increase would lead to a:

$430 decline in real GDP.

If your income increases from $33,000 to $41,000 and your consumption increases from $8,000 to $12,000, your marginal propensity to consume (MPC) is:


According to the interest rate effect, as the price level:

rises, interest rates rise, and people buy less.

In the aggregate demand/aggregate supply model, a country's full-employment real GDP is represented by

aggregate supply.

The aggregate supply curve reflects the relationship between the price:

level and the quantity supplied of all goods in the economy.

Cost-push inflation occurs when the:

aggregate supply curve shifts leftward while the aggregate demand curve is fixed.

When the aggregate demand curve shifts to the right, intersecting the aggregate supply curve on its upward-sloping or vertical segment

demand-pull inflation occurs.

The interest-rate effect is the impact on real GDP caused by the ____ relationship between the price level and the interest rate.


If a new method for obtaining oil from dry oil fields is found, then we will see:

the AS curve shift to the right.

Along the intermediate range of the aggregate supply curve, an increase in the aggregate demand curve will increase:

both the price level and real GDP.

The net exports effect is the ____ relationship between net exports and the price level of an economy.


Stagflation occurs when the economy experiences:

high unemployment and rapid inflation.

Along the Keynesian range of the aggregate supply curve, an increase in the aggregate demand curve will increase:

only real GDP.

Other things constant, an increase in resource prices will:

decrease aggregate supply.

According to the net exports effect, as the price level falls relative to the rest of the world,

foreigners buy more U.S. goods.

During the Great Depression of the 1930s, the aggregate demand curve intersected the aggregate supply curve in the:

horizontal portion of the aggregate supply curve.

Which of the following is a belief of classical theory?

Long-run full employment.

According to Keynesian theory, if equilibrium real GDP is below the full-employment level, then an increase in aggregate demand will result in which of the following changes in equilibrium?

Real GDP will rise, but the price level will remain constant.

The aggregate demand curve slopes downward indicating that:

An increase in the general price level will reduce the aggregate quantity of goods and services demanded.

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then:

both real GDP and the price level will fall.

Demand-pull inflation is caused by:

an increase in aggregate demand.

Along the classical or vertical range of the aggregate supply curve, an increase in the aggregate demand curve will increase:

only the price level.

According to classical macroeconomic theory, if real GDP is below the full-employment level, then an increase in aggregate demand will result in which of the following changes in equilibrium?

Real GDP will remain unchanged but the price level will rise.

In the upward-sloping segment of the aggregate supply curve,

firms are willing to pay higher wages to get more labor.