Fiscal Policy

When the government borrows money so it can increase government spending or decrease taxes, it increases the demand for _____ _____

loanable funds

Money that is available in an economy for the private sector and government to borrow is called:

loanable funds.

Crowding out refers to:

the process by which an increase in government borrowing results in less borrowing.

Some economists argue that fiscal policy is pro-cyclical because if the stimulus arrives after the economy has recovered, it could cause _____-_____ inflation

demand pull

Transfer payments are payments the _____ makes to households and businesses that do not require an exchange of productive activity.

government

One of the most frequently used tools of fiscal policy is changing:

government purchases.

Explicitly raising taxes has the same basic effect on aggregate demand as:

higher tax revenues that result from higher incomes.

Exports minus imports gives us _____ exports

net

With an MPC of 0.8, the tax multiplier will equal _____

-4

Mathematically, the expenditures multiplier equals:

1/(1 - MPC)

Disposable Income (DI)

Income (Y) - Taxes (T)

Net Exports (NX) =

X - M

The economy experiences a positive demand shock causing the economy to boom. Which is an example of an automatic stabilizer that will work to reduce the undesired expansion?

Average tax rates will automatically rise

Real GDP (Y) =

C + I + G + NX

This policy involves involves increasing government purchases and/or decreasing taxes.

Expansionary fiscal policy

Which is an example of an automatic stabilizer that pulls an economy out of an undesired recession?

Increases in transfer payments that increase consumption spending.

Which of the following is a limitation of implementing fiscal policies during a recession?

There are lags that delay the effectiveness of fiscal policy.

A market in which savers determine the supply of loanable funds is called:

a loanable funds market.

A market in which the Federal Reserve or another country's central bank determines the supply of money is called:

a money market

Price level and output both decrease from a successful ___________ fiscal policy.

contractionary

The availability of loanable funds and whether they can be borrowed from other countries:

determines the extent to which crowding out occurs.

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

increase aggregate demand.

Money that is available in an economy for the private sector and government to borrow is called _____ funds

loanable

The _____ lag occurs because we need time to collect and analyze data.

recognition

The extent to which crowding out results in reduced private investment depends on:

the availability of loanable funds

The payment made to agents that lend or save money expressed as an annual percentage of the monetary amount lent or saved is called:

the interest rate

During the Great Recession, economic advisors:

would have encouraged more spending if they had known how bad the economy was.

Mathematically, the tax multiplier equals:

-MPC/(1 - MPC).

Which of the following are the tools of fiscal policy? 1. Taxation 2. Open Market Operations 3. Interest Rate Changes 4. Government Purchases

1 and 4

With an MPC of 0.75, the expenditures multiplier will equal _____

4

Expansion

A phase of the business cycle characterized by increasing real GDP, income, and employment.

Expenditures Multiplier Formula

Change in Y / Change in Expenditures 1 / 1-MPC 1 / MPS

Fiscal Policy

Changes in government purchases and/or taxes designed to achieve full employment and low inflation. Sometimes called discretionary fiscal policy or activist fiscal policy.

Which is a frequently used tool of fiscal policy?

Changes in government purchases.

This policy involves involves decreasing government purchases and/or increasing taxes.

Contractionary fiscal policy

The goal of automatic stabilizers during an undesired economic boom is to:

Decrease consumption spending and aggregate demand.

This policy involves increasing government purchases and/or decreasing taxes.

Expansionary fiscal policy

Fiscal policy relies on three assumptions: 1. Recognizing the start of a recession. 2. Government quickly determines effective policy. 3. The policy is immediately effective. Which of these assumptions hold in the real world?

None of the assumptions hold in the real world.

How does the infrastructure plan (IP) (proposed by former-president Donald Trump) differ from the American Recovery and Reinvestment Act (ARRA) (created by former-president Barack Obama)?

The ARRA is a stabilization policy.

What group was tasked with advising the president on the level of fiscal policy during the Great Recession?

The White House Council of Economic Advisors

Contractionary Fiscal Policy

The application of fiscal policy to decrease aggregate demand; involves decreasing government purchases and/or increasing taxes.If the economy is experiencing rising inflation, the government may want to use contractionary fiscal policy to help lower inflation.

The tax multiplier times the initial change in taxes equals:

a change in aggregate demand.

The path to recovery using contractionary fiscal policy involves:

a jump start of decreased government spending followed by multiple rounds of decreased consumer spending.

A decline in real output for at least two consecutive quarters is called:

a recession

A phase of the business cycle characterized by increasing real GDP income and employment is called:

an expansion.

What is the effect of a successful contractionary fiscal policy on price level and output?

both decrease

What is the effect of a successful expansionary fiscal policy on price level and output?

both increase

The short-term fluctuations experienced in the economy due to changes in levels of economic activity refers to the _____ cycle

business

The path to recovery using fiscal policy involves a jump start of decreased government spending followed by multiple rounds of decreased _____ spending as the economy recovers and incomes rise.

consumer

The path to recovery using fiscal policy involves a jump start of increased government spending followed by multiple rounds of increased _____ spending as the economy recovers and incomes rise.

consumer

_____ + Gross Investment (I) + Government Purchases (G) + Net Exports (NX) characterizes real GDP expenditures.

consumption

The application of fiscal policy to decrease aggregate demand is called _____ fiscal policy

contractionary

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $60 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.75, taxes would need to:

decrease by $20 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. An expansion occurs resulting from a $50 billion increase in aggregate demand. In order to restore the economy to full employment given a MPC of 0.6, government purchases would need to:

decrease by $20 billion.

When taxes increase, AD:

decreases

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

demand-pull inflation.

Income minus taxes gives us the value for ________ income.

disposable

The application of fiscal policy to increase aggregate demand is called _____ fiscal policy

expansionary

The American Recovery and Reinvestment Act is a(n) __________ fiscal policy designed to ________ the economy.

expansionary; stabilize

Consumption (C) + Gross Investment (I) + Government Purchases (G) + Net Exports (NX) characterizes real GDP _____

expenditures

Net exports equals:

exports minus imports.

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

fiscal

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

fiscal

Lags hamper the effectiveness of _____ policy

fiscal

Price level and output both increase from a successful expansionary _____ policy

fiscal

During a recession, Congress decides to enact legislation changing the tax system, reducing tax rates across all tax brackets. This is an example of:

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.

Taxes are revenues collected by the _____ from individuals and firms. (Enter the general term applicable to all countries.)

government

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:

increase by $20 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $100 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.75, government purchases would need to:

increase by $25 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. An expansion occurs resulting from a $50 billion increase in aggregate demand. In order to restore the economy to full employment given a MPC of 0.50, taxes would need to:

increase by $50 billion.

During an undesired recession, transfer payments will:

increase, causing consumption and aggregate demand to increase.

When government spending increases, AD:

increases

When taxes decrease, AD:

increases

The condition Y = Yfull employment refers to _____ _____ equilibrium

long run

The path to recovery using expansionary fiscal policy involves:

multiple rounds of increased consumer spending. increased government spending.

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

multiplier

A decline in real output for at least two consecutive quarters is called a(n) _____

recession

A common definition of a(n) _____is: a period in which an economy experiences a(n) _____ (decrease/increase) in real GDP for at least two consecutive quarters or six months.

recession, decrease

Because of the _____ lag, we can't be sure that a proposed stimulus will be the right size to increase aggregate demand by the right amount since any data we see will already be a few months old.

recognition

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

reduce

When an economy is producing above full employment, the goal of fiscal policy will be to:

reduce aggregate demand.

When income falls, average tax rates fall, which stimulates aggregate demand and _____ unemployment

reduces

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

reducing

The main difference between fiscal policy and automatic stabilizers is fiscal policy:

requires active changes through legislation, automatic stabilizers do not.

The condition AD = AS refers to _____ _____ equilibrium

short, run

A change in aggregate demand equals the _____ multiplier times the initial change in taxes.

tax

One of the most frequently used tools of fiscal policy is changing: (pt.2)

taxes

The multiplier effect is:

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

Full-employment GDP refers to:

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

Multiplier Effect

The concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP.

Expenditures Multiplier

The effect that a $1 change in expenditure has on real GDP; calculated as the ratio of the total change in real GDP due to a change in initial expenditure.q

Marginal Propensity to Consume (MPC)

The fraction of each additional dollar of income that is spent on consumption.

Business Cycle

The short-term fluctuations experienced in the economy due to changes in levels of economic activity.

Suppose that 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 resulting from a $120 billion decrease in aggregate demand. In order to restore the economy to full employment given an MPC of 0.75, taxes would need to:

decrease by $40 billion.

When government spending decreases, AD:

decreases

As the economy expands, reliance on transfer payments that fund programs _____ (increases/decreases). Government spending _____ (rises/falls) since the government is now paying for _____ (less/more) medical care food and housing.

decreases, falls, less

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

fiscal policy

The path to recovery using fiscal policy involves a jump start of increased _____ spending followed by multiple rounds of increased consumer spending as the economy recovers and incomes rise.

government

Suppose that an economy is in long-run equilibrium at a price level of 100 and a full-employment real GDP of $500 billion. An expansion occurs resulting from a $30 billion increase in aggregate demand. In order to restore the economy to full employment given an MPC of 0.75, taxes would need to:

increase by $10 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $100 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.80, government purchases would need to:

increase by $20 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $50 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.6, government purchases would need to:

increase by $20 billion.

Recession

A decline in real output for at least two consecutive quarters.

Full Employment

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment. Also, the level of real GDP when the economy is in a long-run equilibrium.

Full-Employment Real GDP

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment. Also, the level of real GDP when the economy is in a long-run equilibrium.

The process by which an increase in government borrowing results in less borrowing by businesses and consumers for private investment is called _____ _____

crowding out

The process by which an increase in government borrowing results in less borrowing by businesses and consumers for private investment is called:

crowding out

When the government borrows money so it can increase government spending or decrease taxes, it increases the _____ for loanable funds

demand

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

employment

Some economists argue that fiscal policy is pro-cyclical because if the stimulus arrives after the economy has recovered, it could cause demand-pull _____

inflation

The payment made to agents that lend or save money expressed as an annual percentage of the monetary amount lent or saved is called the _____ _____

interest rate

During a recession, more people begin to receive unemployment payments, food stamps, Medicaid, and payments from other government programs causing government spending to automatically increase. (True or False)

true

A common definition of a recession is: a period in which an economy experiences a decline in real GDP for at least _____ consecutive quarters or _____ months

two, six

Expansionary Fiscal Policy

The application of fiscal policy to increase aggregate demand; involves increasing government purchases and/or decreasing taxes.If the economy is experiencing a recession, the government may want to use expansionary fiscal policy to help the economy recover more quickly.

Which of the following describes the short-term fluctuations experienced in the economy due to changes in levels of economic activity?

The business cycle

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $100 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.80, taxes would need to:

decrease by $25 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. An expansion occurs resulting from a $100 billion increase in aggregate demand. In order to restore the economy to full employment given a MPC of 0.75, government purchases would need to:

decrease by $25 billion.

When the government borrows money so it can increase government spending or decrease taxes,:

it increases the demand for loanable funds.

The interest rate is:

the payment made to agents that lend or save money.