Advanced Macroeconomics: Policies and Economic Indicators Quiz

The tax multiplier is not always one-half of the regular income/spending multiplier. It can vary based on the specific economic conditions and assumptions being made.

In the macroeconomic model, leakages represent factors that remove money from the circular flow of income, impacting economic activity. Savings, taxes, and imports are indeed considered as the three leakages in the traditional model.

The correct answer highlights the trend of budget deficit over the last few decades in the United States with the exception of limited surplus years around 2000, providing a clear overview of the government's fiscal position.

The correct answer is false because international trade may lead to a dilution of the multiplier effect due to leakages such as imports and potential currency appreciation.

The correct answer is false. The United States federal debt as a percentage of the national economy during World War II was significantly higher than it is currently.

The tax multiplier for a lump sum tax is calculated by dividing the marginal propensity to consume by 1 minus the marginal propensity to consume. Therefore, tax multiplier = 0.9 / (1 - 0.9) = 0.9 / 0.1 = -9.

With a marginal propensity to consume of 0.8, the multiplier effect can be calculated as 1/(1-0.8) = 5. Therefore, the output would decrease by 5 times the initial tax increase, resulting in a decrease of $2,000 million.

The correct equation for the tax multiplier for a lump sum tax is (-mult * mpc), where -mult represents the change in real GDP due to a change in taxes, and mpc represents the marginal propensity to consume.

Disposable income is the income remaining after deducting taxes and other mandatory deductions from total income. It is not just what is left after paying for necessary items like food and shelter.

When individuals spend money on imported goods, a portion of that spending leaves the domestic economy, reducing the overall impact of the multiplier effect. This decreases the effectiveness of monetary policy and can result in lower overall economic growth.

In the Keynesian cross diagram, an increase in taxes would shift the aggregate expendityure downward, reducing overall output and income. The other options would not directly cause the shift shown in the diagram.

Total federal government outlays in the United States have actually increased as a percentage of GDP in recent decades, not declined.

Expansionary fiscal policy, involving an increase in government spending and/or decrease in taxes, is typically used to stimulate economic growth and combat recession, not to counteract high inflation rates. In fact, expansionary fiscal policy can exacerbate inflation by increasing demand in the economy.

In this scenario, the increase in government spending is offset by an equal increase in taxes, resulting in no net change to output as per the model.

The multiplier effect suggests that the increase in income resulting from an initial increase in spending will be greater than the initial spending amount due to the subsequent rounds of spending and re-spending that occur in the economy.

In a macroeconomic model with all three injections and all three leakages present, the economy can still experience fluctuations and imbalances leading to disequilibrium.

The correct answer is 40%. In 2006, the federal debt in the United States was approximately 40% of the Gross Domestic Product.

Supply-side economics argues that reducing taxes can stimulate economic growth, leading to higher income levels and increased tax revenues due to a larger tax base. This theory suggests that cutting taxes can potentially result in higher government revenues, though the extent of this effect is debated.

Automatic stabilization refers to the built-in economic stabilizers that help offset fluctuations in economic activity without requiring explicit action by policymakers. In the case of fiscal policy, government spending tends to decrease during economic expansions as tax revenues increase, helping to prevent overheating of the economy.

Expansionary fiscal policy typically involves an increase in government spending and/or a decrease in taxes to stimulate economic growth. As a result, it is least likely to cause unemployment to increase. On the contrary, it aims to lower unemployment rates by boosting aggregate demand in the economy.

Decreasing taxes is an example of expansionary fiscal policy because it puts more money into the hands of consumers and businesses, leading to increased spending and overall economic growth.

In the Keynesian macro model, an increase in government spending will lead to a multiplied increase in equilibrium output due to the marginal propensity to consume. With a marginal propensity to consume of 0.9, for every $1 increase in government spending, $0.90 will be spent and the remaining $0.10 will be saved, resulting in a total increase of $10 for every $1 increase in government spending. Therefore, with a $50 million increase in government spending, the equilibrium output will increase by $500 million.

Supply-side economics emphasizes the importance of tax cuts to incentivize individuals and businesses to work more, invest in the economy, and ultimately drive higher output and tax revenues. The focus is on promoting economic growth by reducing tax burdens on production and investment.

Contractionary fiscal policy is typically used when the economy is overheating, characterized by high inflation. This policy aims to reduce the level of aggregate demand to curb inflationary pressures.

Foreign bond holders own a significant portion of the US federal government debt, which contributes to a growing percentage of the total debt. While domestic banks, individual taxpayers, and private corporations may hold some government debt, the majority is owned by foreign entities.

While a budget surplus can have some positive effects on economic growth, it is not always the case. There are several other factors that influence economic growth including overall economic conditions, monetary policy, and global economic trends.

Supply-side economics actually focuses on reducing barriers to production and increasing incentives for businesses to invest and produce more goods and services. It is more closely associated with tax cuts and deregulation rather than government spending.

The correct term for the time it takes Congress to debate and agree upon a tax policy change is known as a legislative lag. This term specifically refers to the time lag between the identification of a problem and the implementation of a policy solution.

While national defense is a significant portion of federal spending, Social Security actually accounts for the largest source of federal outlays in the US.