Ch. 13 & 16
A recessionary gap is a gap that exists when potential GDP _____ real GDP and that brings a _____ price level. An inflationary gap is a gap that exists when real GDP _____ potential GDP and that brings a _____ price level.
exceeds; falling; exceeds; rising
An automatic fiscal policy is a fiscal policy action that is triggered by _____. A discretionary fiscal policy is a fiscal policy action that is initiated by _____.
the state of the economy; an act of Congress
The U.S. economy is at full employment when the following events occur: 1. A deep recession hits the world economy. 2. The world oil price rises by a large amount. 3. U.S. businesses expect future profits to fall.
A deep recession in the world economy decreases foreign income. U.S. exports will decrease, and U.S. aggregate demand decreases. A rise in the world oil price makes firms' costs increase. U.S. aggregate supply decreases. A fall in expected future profits decreases the investment that firms plan to undertake now and decreases aggregate demand.
If potential GDP is $600 billion, the economy is _______. A.below full employment and has a recessionary gap B.above full employment and has an inflationary gap C.at a full-employment equilibrium
B.above full employment and has an inflationary gap
In the long run, ______. A.potential GDP increases to $800 billion B.aggregate supply decreases and aggregate demand decreases, the price level either rises or falls, and real GDP decreases to potential GDP C.aggregate demand decreases, the price level falls, and real GDP decreases to potential GDP Your answer is not correct. D.aggregate supply decreases, the price level rises, and real GDP decreases to potential GDP
D. aggregate supply decreases, the price level rises, and real GDP decreases to potential GDP
Explain the effect of each event on real GDP and the price level in the short run.
Event 1 decreases real GDP and lowers the price level Event 2 decreases real GDP and raises the price level Event 3 decreases real GDP and lowers the price level
Which of the following statements illustrates fiscal policy?
Fiscal policy includes changing taxes, transfer payments, and government expenditure on goods and services. The US government has proposed a hike in the corporate tax rate.
The economy is in a boom and the inflationary gap is large. Discretionary fiscal policy that might occur is ______.
a decrease in government expenditure and an increase in taxes
In the short run, when fuel prices rose India's aggregate supply ______.
decreased
In the short run, when the price level in India increased India's aggregate supply ______.
didn't change, but the quantity of real GDP supplied increased
In the short run, when U.S. firms moved their IT and data functions to India, India's aggregate supply ______. A.decreased because more of India's workers are now employed by U.S. firms B.increased C.didn't change, but U.S. aggregate supply increased D.didn't change, but a higher price level brought an increase in the quantity of real GDP supplied E.became part of U.S. aggregate supply
increased As U.S. firms moved their IT and data functions to India, real GDP supplied at the current price level increased. The AS curve shifted rightward.
Suppose that the U.S. government increases its expenditure on highways and bridges by $100 billion. As a result of this expenditure, aggregate demand ______. If the economy is in a recession, real GDP _______.
increases by more than $100 billion because consumption expenditure increases in a multiplier process; increases
Aggregate demand decreases if the exchange rate ______ or foreign income ______. Aggregate demand decreases if monetary policy ______ the quantity of money and ______ interest rates. Aggregate demand decreases if fiscal policy ______ taxes or ______ transfer payments. Aggregate demand decreases if expected future income, inflation, or profits ______. And aggregate demand decreases if fiscal policy ______ government expenditure.
increases; decreases decreases; increases increases; decreases decreases; decreases
The BEA announced that demand for durable goods rose 3.4% while new-home sales rose 13.4% in the second quarter of 2013. U.S. exports increased 5.4% while U.S. imports increased 9.5%. The increase in the demand for durable goods ______ aggregate demand. The increase in new-home sales ______ aggregate demand.
increases; increases The quantity of real GDP demanded is the sum of real consumption expenditure, investment, government expenditure on goods and services, and exports minus imports. The rise in U.S. imports exceeds the rise in U.S. exports, which decreases the demand for U.S.-produced goods and services and decreases U.S. aggregate demand.
Aggregate demand is the relationship between the quantity of _____ demanded and the _____ when all other influences on expenditure plans remain the same.
real GDP; price level
Aggregate supply is the relationship between the quantity of _____ supplied and the _____ when all other influences on production plans remain the same.
real GDP; price level
When a tax is applied to labor income, the result is a ______ quantity of labor and a ______ potential GDP.
smaller; lower When a tax is applied to labor income, the supply of labor curve shifts leftward. The equilibrium quantity of labor decreases. As the equilibrium quantity of labor decreases, a movement occurs leftward along the production function and potential GDP decreases.