ECON Chapter 18 Study Guide
One-time rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time rebates increase
Current income
Complete the following table for a static AD-AS model:
Decrease taxes; rise Decrease gov't spending; fall
Consider the figure to the right. An increase in government spending shifted the aggregate demand curve from AD1 to AD2. As a result, both price level and real GDP increased. What can be said, however, about the increase in real GDP?
It increased by less than indicated by a multiplier with a constant price level.
When is it considered "good policy" for the government to run a budget deficit?
When borrowing is used for long-lived capital goods.
Does government spending ever reduce private spending?
Yes, due to crowding out.
What is the difference between federal government purchases (spending) and federal government expenditures?
Government purchases are included in government expenditures.
As a result of crowding out in the short run, the effect on real GDP of an increase in government spending is often
Less than the increase in government spending
After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?
No. The increase in defense spending after that date was designed to achieve homeland security objectives.
What are the gains to be had from simplifying the tax code?
All of the above
The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06, we would expect the federal government to pursue a(n) _______ fiscal policy. If the government's policy is successful, what is the effect of the policy on the following macroeconomic indicators? Actual real GDP _______. Potential real GDP ________. Price level _______. Unemployment _______.
Contractionary Decreases; does not change; decreases; increases
The figure to the right illustrates the dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). We would expect the federal government to pursue what type of policy in order to move AD2 to AD2, policy and reach equilibrium (point C) in the second period? _______. If the federal government's policy is successful, what is the effect on the following macroeconomic indicators? Actual real GDP: _______ Potential real GDP: ________ Price level: _______ Unemployment: _______
Expansionary fiscal policy Increases; does not change; increases; decreases
The figure to the right illustrates the dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). What policy would the federal government likely pursue in order to move AD2 to AD2, policy and reach equilibrium (point C) in the second period?
Increase government spending
The graph to the right shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential GDP?
Increase government spending or decrease taxes Picture 1
How does a budget deficit act as an automatic stabilizer and reduce the severity of a recession?
All of the above
Increased government debt can lead to higher interest rates and, as a result, crowding out of private investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the economy?
All of the above
Consider the figures below. Determine which combination of fiscal policies shifted AD1 to AD2 in each figure and returned the economy to long-run macroeconomic equilibrium.
Example (A): Expansionary fiscal policy. Example (B): Contractionary fiscal policy.
Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge is called
Supply-side economic