Chapter 37

Wages will become flexible and spending growth will recover to increase aggregate demand, moving the economy to point X.

(Figure: Aggregate Demand and Fiscal Policy) Refer to the figure. For an economy in a recession at point Z, what will happen in the long run in the absence of any government action to counter the recession?

increase aggregate demand to move the economy to point X

(Figure: Aggregate Demand and Fiscal Policy) Refer to the figure. In the best case scenario, effective fiscal policy would take which action to correct an economy in recession at point Z?

Tax rebate

Another form of expansionary fiscal policy in addition to government spending is:

larger shift of the aggregate demand curve to the right.

As a result of the multiplier effect, a tax cut causes a:

increases in government spending become a more effective means of stimulating aggregate demand.

As the savings rate in the private sector rises:

limits the increase in aggregate demand due to fiscal policy.

Crowding out:

cyclical deficit.

Economists use the term _____________________ to describe the part of the budget deficit that is a result of a downturn in economic activity.

food stamps, unemployment benefits, and income taxes.

Examples of automatic stabilizers include:

shock to aggregate demand.

Fiscal policy is MOST effective in keeping both inflation and real growth stable when there is a:

shocks to aggregate demand.

Fiscal policy is MOST effective in offsetting the effects of:

consumer spending is very low.

Fiscal policy is a good option to stimulate an economy when:

are generally longer than monetary policy lags.

Fiscal policy lags:

private saving will increase by $100 million.

If Ricardian equivalence holds, then a $100 million tax cut financed by issuing government bonds means that:

taxpayers respond to lower tax rates today with increased savings today.

If Ricardian equivalence holds:

fiscal policy needs to raise G by less than the decrease in C .

If consumption growth decreases, the government spending "multiplier effect" means that in order to counter the recession:

No government action can achieve those goals.

If the economy is hit by a negative real shock that raises inflation and unemployment, which fiscal policy action should the government take in order to keep inflation and unemployment stable?

increase government spending and cut taxes, thus running a higher budget deficit.

If the economy is in a recession, the most appropriate fiscal policy would be to:

not need to be as large as the initial fall in consumer spending.

Imagine an economy in a recession resulting from a decrease in consumer spending. In the best case scenario, increased government spending to fight the recession would:

They both target aggregate demand to overcome business fluctuations.

In what way are monetary and fiscal policies similar?

lead to higher interest rates.

Increases in government spending financed through additional borrowing will typically:

the AD curve to shift to the left.

Other things being equal, a decrease in government spending growth causes:

increasing taxes so that the AD curve shifts back to AD1.

Refer to the figure. Suppose the economy is initially at point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short-run increase in inflation by:

taxes in the future.

Ricardian equivalence refers to the case where lower taxes today lead to higher:

is less significant when consumers deem tax cuts or rebates as permanent.

Ricardian equivalence:

remain unchanged.

Suppose the federal government gives taxpayers a tax rebate financed by borrowing. If taxpayers use the tax rebate to pay off their debts, total spending will:

legislative.

The ____________ lag consists of the time it takes the president and Congress to propose some fiscal policy measure, build support for it, and get it passed.

dead.

The economist John Maynard Keynes said, "In the long run, we are all _______ ."

longer for changes in government spending than for changes in taxation.

The implementation lag is likely to be:

an increase in consumer spending.

The multiplier effect from an increase in government spending causes additional increases in aggregate demand through:

upward pressure that increased borrowing places on interest rates.

The primary concern of economists worried about the crowding out effect is the:

when AD is low compared with the long-run equilibrium position of the economy

Under which scenario would expansionary fiscal policy work BEST?

the velocity of money

When consumers cut back on spending _____fall(s).

consumer spending.

When fiscal policy is funded through taxes, government spending primarily crowds out:

the crowding out effect

Which refers to the decrease in private spending when government spending increases?

A tax cut increases the incentive to work and the incentive to spend, while a tax rebate only increases the incentive to spend.

Which statement is TRUE of the difference between a tax cut and a tax rebate?