UNIT 5 - Fiscal Policy

The level of real GDP at the natural rate of unemployment is called ____ _______ real GDP.

full employment

What is the expenditures multiplier formula?

1/(1-MPC) or 1/MPS

Which of the following policies involves decreasing government purchases and/or increasing taxes?

Contractionary Fiscal Policy

What are the tools of Contractionary Fiscal Policy?

Decrease govt purchases; increase taxes

What are the 3 goals of expansionary fiscal policy?

Increase aggregate demand, Expand real GDP, Reduce unemployment

What are the tools of expansionary fiscal policy?

Increase govt. purchases, decrease taxes

Which of the following occurs when income falls and the average tax rates fall?

It stimulates aggregate demand and decreases unemployment.

How do you find the change in aggregate demand needed?

Multiplier(expenditures of tax) * change in (govt.spending or taxes)

What are the three limitations of fiscal policy?

Recognition lag, legislative lag, implementation lag -- We don't immediately know when a recession starts, Congress does not react quickly enough to determine policy, Policy is not always immediately effective

What is the concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP called?

The multiplier effect

What are loanable funds used for when determining fiscal policy? Who provides loanable funds?

They are used for the govt. who can borrow them. Provided by firms/people who loan $$$ out to earn interest.

What is Contractionary Fiscal Policy used for?

To decrease aggregate demand in order to combat inflation

Government policy has limitations that reduce its effectiveness and may even cause the opposite of what was intended.

True

Suppose an economy is in long-run equilibrium at a price level of 100 and a full-employment real GDP of $520 billion. A recession occurs because of a $120 billion decrease in aggregate demand. To restore the economy to full employment given an MPC of 0.75, taxes would need to: ___ by ____ billion.

decrease, 40

With demand-pull inflation, active fiscal policy calls for ________ government purchases.

decreasing

Active fiscal policy calls for reducing government purchases in case of:

demand-pull inflation.

Changes in government purchases and/or taxes designed to achieve full employment and low inflation is called:

fiscal policy

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment is called:

full-employment GDP

What are automatic stabilizers?

government spending and taxes that automatically increase or decrease along with the business cycle Govt. spending increases/decreases AUTOMATICALLY as more/less people rely on govt. programs (medicare)

If the economy is experiencing a recession, the goal of fiscal policy will be to:

increase agg. demand

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $600 billion. An expansion occurs resulting from a $80 billion increase in aggregate demand. In order to restore the economy to full employment given a MPC of 0.80, taxes would need to: ____ by ______ billion.

increase by $20 billion.

What is crowding out?

increased government spending leads to borrowing more which means interest rates go up and this leads to a decrease in investment when an increase in government spending decreases a component of GDP (most likely investment)

In the short run, in order to stimulate aggregate demand and avoid falling output and prices, the government could reduce?

taxes

What is full-employment GDP?

the level of real GDP produced in an economy when it is operating at the natural rate of unemployment.