ECO 210 chapter 12&13 quiz

Built-in stability means that

with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus, while a decline in income will result in a deficit or a lower budget surplus.

The economy experiences a decrease in the price level and an increase in real domestic output. Which is a likely explanation?

Business costs and wage rates have decreased.

An appropriate fiscal policy for a severe recession is

a decrease in tax rates.

Collective bargaining agreements that prohibit wage cuts for the duration of the contract contribute to

a price level that is inflexible downward.

The U.S. economy was able to achieve full employment with relative price level stability between 1996 and 2000 because

aggregate demand increased and aggregate supply increased.

Countercyclical discretionary fiscal policy calls for

deficits during recessions and surpluses during periods of demand-pull inflation.

Fiscal policy refers to the

deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.

The crowding-out effect of expansionary fiscal policy suggests that

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

A decrease in aggregate demand will cause a greater decline in real output the

less flexible is the economy's price level.

The aggregate supply curve (short run) is upsloping because

per-unit production costs rise as the economy moves toward and beyond its full-employment real output.

An expansionary fiscal policy is shown as a

rightward shift in the economy's aggregate demand curve.

Graphically, demand-pull inflation is shown as a

rightward shift of the AD curve along an upsloping AS curve.

The aggregate supply curve

shows the various amounts of real output that businesses will produce at each price level.

One timing problem in using fiscal policy to counter a recession is the "recognition lag" that occurs between the

start of the recession and the time it takes to recognize that the recession has started.

An economist who favors smaller government would recommend

tax cuts during recession and reductions in government spending during inflation.

If the economy has a cyclically adjusted budget surplus, this means that

tax revenues would exceed government expenditures if full employment were achieved.

The equilibrium price level and level of real output occur where

the aggregate demand and supply curves intersect.

Deflation refers to a situation where

the price level falls; it could be caused by a shift of AD to the left.

(Consider This) The ratchet effect is the tendency of

the price level to increase but not to decrease.

The cyclically adjusted budget refers to

the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment.

Wage contracts, efficiency wages, and the minimum wage are explanations for why

wages tend to be inflexible downward.

If aggregate demand increases and aggregate supply decreases, the price level

will increase, but real output may increase, decrease, or remain unchanged.

The so-called ratchet effect refers to the characteristic in the economy where product prices, wages, and per-unit production cost are flexible when

AD increases but not when AD decreases.