Unit 5 LearnSmart: Fiscal Policy, Deficits, and Debt

Why will an inflationary GDP gap cause further inflation? -Because output prices rise further as production decreases. -Because input prices rise in the long run in order to meet the increase in outputs prices. -Because output prices rise in the long run in order to meet the increase in input prices. -Because input prices rise further as production decreases.

Because input prices rise in the long run in order to meet the increase in outputs prices.

When demand-pull inflation occurs, what kind of fiscal policy may help control it? Decreased taxes Expansionary Increased government spending Contractionary

Contractionary

What is another term for restrictive fiscal policy?

Contractionary fiscal policy

What is another term for restrictive fiscal policy? Contractionary fiscal policy Expansionary fiscal policy Evaluative fiscal policy Natural fiscal policy

Contractionary fiscal policy

Discretionary fiscal policy action is often taken on the advice of which group?

Council of Economic Advisers

____ fiscal policy is also known as active fiscal policy.

Discretionary

_____ fiscal policy changes do not occur automatically, but rather are made at the option of the Federal government.

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. True False

False Along the flat portion of the short-run AS curve, an increase in aggregate demand will cause real output to rise, with a multiplier effect.

The government may reduce government spending or increase taxes in order to eliminate a(n) _____. Recessionary GDP gap Budget surplus Trade deficit Inflationary GDP gap

Inflationary GDP gap

When there is a ratchet effect, what happens to the price level when aggregate demand (AD) declines? Not enough information The price level remains the same The price level increases The price level decreases

The price level remains the same

When aggregate demand increases, the price level rises. But when aggregate demand decreases, the price level tends to be inflexible. What effect does this describe? The wealth effect The inflation effect The ratchet effect The demand effect

The ratchet effect

If the economy starts out with a balanced Federal budget, a subsequent expansionary fiscal policy will create a _____. lower tax rate budget deficit lower inflation rate budget surplus

budget deficit

When the government uses _____ fiscal policy to correct demand-pull inflation, the ratchet effect prevents the price level from returning to its former level.

contractionary

If the desired initial increase in spending is $5 billion and the MPC is 0.75, then taxes must _____ by $6.67 billion.

decrease

A budget _____ is government spending in excess of tax revenues.

deficit

A decrease in aggregate _____ causes real GDP to decline.

demand

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

fiscal

The Federal government's purposeful manipulation of taxes and spending in order to "stimulate the economy" or "rein in inflation" is known as: monetary policy taxation policy government policy fiscal policy

fiscal policy

Opponents of increased spending during recession and increased taxes in times of demand-pull inflation, argue that these policies expand or preserve the size of _____.

government

The multiplier effect causes the aggregate demand curve to shift by an amount _____ than an initial change in government spending.

greater

If the marginal propensity to consume is 0.75 and the government cuts taxes by $8 billion, then consumption spending will _____ by $6 billion and savings will increase by $2 billion.

increase

The upsloping aggregate supply curve means that rightward shifts of aggregate demand result more in demand-pull _____ than in increased output.

inflation

To correct a(n) _____ GDP gap, the government would need to shift aggregate demand to the left.

inflationary

To induce an increase in consumption through a tax-cut, the smaller the MPC is, the _____ the tax-cut needs to be: smaller same size larger

larger

To have the same impact on aggregate demand as a $100 billion increase in government spending, a tax-cut would need to be _____. equal to $100 billion larger than $100 billion smaller than $100 billion

larger than $100 billion

Reduced government spending, in response to demand-pull inflation, shifts the aggregate demand (AD) curve to the _____.

left

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

multiplier

Policy changes that occur without congressional action are known as _____, passive, or automatic.

non-discretionary

An economy's _____ output is also known as full-employment output.

potential

Increases in aggregate demand that expand real output beyond the full-employment level tend to move the price level upward. Declines in aggregate demand do not seem to push the price level downward. This is known as the _____ effect. hammer supply ratchet price

ratchet

An economy producing below potential output is considered to be operating in a(n) _____ gap.

recessionary

The government can _____ taxes to shift the aggregate demand curve rightward.

reduce

Other things equal, an increase in government spending will shift an economy's aggregate demand curve to the _____.

right

To positively stimulate an economy using fiscal policy, government spending should _____, and taxes should _____. rise; fall fall;fall fall;rise rise;rise

rise; fall

If government disregards or underestimates the multiplier effect, contractionary fiscal policy could cause aggregate demand to: -not shift far enough leftward -shift leftward further than potential output -shift rightward further than potential output -not shift far enough rightward

shift leftward further than potential output

Expansionary fiscal policy is used in order to _____ the economy. increase interest rates in reduce inflation in stimulate reduce GDP in increase unemployment in

stimulate

When the economy faces demand-pull inflation, fiscal policy should move toward a government budget balancing deficit surplus

surplus

Government can use which of the following to reduce consumption? reducing the interest rate inflation tax decreases tax increases

tax increases

The government can help correct a recession by implementing expansionary fiscal policy that reduces _____ to increase consumption spending and aggregate demand.

taxes

A recession results in a negative GDP gap and increase in _____ will always accompany this gap.

unemployment