Macroeconomics Test #3 Chapter 31

Crowding-Out effect

An expansionary fiscal policy (deficit spending) may increase the interest rate and reduce investment spending, thereby weakening or canceling the stimulus of the expansionary policy.

which of the following are used to describe policy changes that occur without congressional action?

Automatic, non discretionary, and passive.

When tax revenue exceeds gov spending?

Budget Surplus

Other things equal, an increase in gov spending will have what effect on an economy's aggregate demand curve?

Cause it to shift out rightward.

Expansionary Fiscal Policy

Consists of government spending increases, tax reductions, or both to increase aggregate demand and therefore raise real GDP.

Contractionary Fiscal Policy

Consists of government spending reductions, tax increases, or both designed to decrease aggregate demand and therefore eliminate or lower inflation.

Another term for fiscal policy?

Contractionary Fiscal Policy

When demand pull inflation occurs, what kind of fiscal policy may help control it?

Contractionary.

During a recession, the government can __ taxes to increase consumption and shift the aggregate demand curve to the ___

Decrease, right

The gov can __ taxes to shift the aggregate demand curve rightward.

Decrease.

If the economy starts out with a balanced federal budget, a subsequent expansionary fiscal policy will create a budget __.

Deficit.

Fiscal Policy

Deliberate changes in government spending and tax collections to achieve full employment, control inflation, and encourage economic growth.

___ Fiscal policy is also known as active fiscal policy

Discretionary

___ Fiscal policy is used in response to recession.

Expansionary

An increase in aggregate demand along the flat portion of the short run aggregate supply curve will result in an increase in the price level without much effect on real output

False.

US Government Securities

Financial instruments issued by the federal government to borrow money to finance expenditures that exceed tax revenues.

The government's purposeful manipulation of taxes and spending in order to "stimulate the economy" or "rein in inflation" is known as

Fiscal policy

Budget Deficit

Government spending in excess of tax revenues.

The unsloping aggregate supply curve means the rightward shifts of aggregate demand result more in demand pull ___ than in increased output.

Inflation

The government may reduce government spending or increase taxes in order to eliminate an ___

Inflationary GDP gap

Recognition Lag

Is the time between the beginning of recession or inflation and the certain awareness that is actually happening. It arises because the economy does not move smoothly through the business cycle.

To induce an increase in consumption through a tax cut, the smaller the MPC is, the ___ the tax cut needs to be.

Larger.

The ___ process magnifies the initial change in spending into successive rounds of new consumption spending.

Multiplier

An economy's ___ output is also known as full employment outputs.

Potential

A decrease in aggregate demand reduces

Real GDP

What is the result of an increase in aggregate demand that occurs along the short run aggregate supply curve where the price level does not rise?

Real output rises by the full extent of the multiplier

Timing may arise

Recognition, administrative and operational lags.

If gov disregards or underestimates the multiplier effect contra dictionary fiscal policy cause aggregate demand to

Shift leftward further than potential output

Expansionary fiscal policy is used in order to __ the economy.

Stimulate.

Budget __ occurs when tax revenues exceed gov spending.

Surplus

The aggregate demand curve shifts by an amount greater than an initial change in gov. spending. This is created by:

The Multiplier Effect

When aggregate demand increases, the price level rises but when aggregate demand decreases, the price level tends to be inflexible. What effect is this?

The Ratchet Effect.

Public Debt

The accumulation of all past federal deficits and surpluses.

When there is a ratchet effect, what happens to the price level when aggregate demand (AD) declines?

The price level remains the same.

A recession results in a negative GDP gap and increases in ____ will always accompany this gap.

Unemployment

Budget Surplus

When the economy faces demand pull inflation. Tax revenues in excess government spending.

Discretionary Fiscal Policy

consists of deliberate changes in gov spending and taxation designed to achieve full employment, control inflation, and encourage economic growth.

Which of the following fiscal tools the gov may use to eliminate an inflationary GDP gap?

increase taxes, decrease gov spending, a combination of both reduced gov spending and increase taxes.