An appropriate fiscal policy option to move the economy to full employment is to increase government expenditure and move the economy to a full-employment equilibrium at point b. If the government uses fiscal policy to close a recessionary gap, government expenditure can be increased by less than the gap because of the government expenditure multiplier Ignoring any supply-side effects, to close a recessionary gap of $100 billion with a government expenditure multiplier of 5, the government could *look at drawingĪn economy is at a short-run equilibrium as illustrated in the above figure. To increase real GDP, the government can use a fiscal stimulus of decreasing taxes and/or increasing government expenditure. a recessionary increases aggregate demand In order to help the economy recover from a recession using fiscal policy, the government can _ so that aggregate demand increases cut taxes Which of the following is an example of a fiscal stimulus? decrease in taxes Suppose the economy is in an equilibrium in which real GDP is less than potential GDP. If the economy is in equilibrium with real GDP less than potential GDP, there is _ gap and a fiscal policy that _ is appropriate. If a change in the tax laws leads to a $100 billion decrease in tax revenue, then aggregate demand increases by more than $100 billion. If government expenditures on goods and services increases by $20 billion, then aggregate demand increases by more than $20 billion The tax multiplier is the magnification effect of a change in taxes on aggregate demand. The government expenditure multiplier is used to determine the amount aggregate demand is affected by a change in government expenditure. Discretionary fiscal policy is a fiscal policy action, such as a tax cut, initiated by an act of Congress. This action is called a discretionary fiscal policy. In 2009, Congress passed tax laws to reduce income tax rates for some taxpayers. Discretionary fiscal policy is defined as fiscal policy initiated by an act of Congress. increases decrease Automatic stabilizers decrease the impact of a recession on the level of economic activity because they mean disposable income does not change by as much as real GDP. In a recession, needs-tested spending _ and induced taxes _. government has generally had a government budget _ and so the national debt has _.Į) deficit decreased deficit increased Automatic stabilizers are defined asĪ) policy that stabilizes without the need for action by the governmentī) actions taken by the President without Congressional consent to stabilize the economyĬ) actions taken by an act of Congress to stabilize the economyĮ) discretionary policy taken to stabilize the economy policy that stabilizes without the need for action by the government An example of automatic fiscal policy isĪ) a change in taxes that has no multiplier effectī) Congress passing a tax rate reduction packageĬ) expenditure for unemployment benefits increasing as economic growth slowsĭ) the Federal Reserve reducing interest rates as economic growth slowsĮ) the federal government expanding spending at the Department of Education expenditure for unemployment benefits increasing as economic growth slows Induced taxes are defined as taxesĪ) enacted by Congress that explicitly state the amount to be paidĬ) that rise in recessions and fall in expansionsĭ) that are avoided with the use of legal tax sheltersĮ) we are forced to pay for services from the government that vary with real GDP Needs-tested spending is defined asĪ) spending by Congress on its own perks of officeī) taxes paid by those qualified by their incomeĬ) spending on programs for people qualified to receive benefitsĭ) spending by the President on the White HouseĮ) spending that increases in expansions and decreases in recessions spending on programs for people qualified to receive benefits In a recession, needs-tested spending _ and induced taxes _.Automatic stabilizers include changes in induced taxes and changes in needs-tested spending.
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