ap econ fiscal policy unit 3

discretionary policy

policy that is the direct result of deliberate actions by policy makers rather than rules

increase AD

price levels in germany, japan and britain rise considerably, while price levels in the US remain unchaged

unemployment; inflation

problem in contractionary gap? expansionary gap?

AC

tell if automatic or discretionary and if expansionary or contractionary: income rises and as a result, people pay a larger fraction in taxes

automatic fiscal policy

Changes in government expenditures and/or taxes that occur automatically without (additional) congressional action.

DC

tell if automatic or discretionary and if expansionary or contractionary: the gov eliminates favorable tax treatment on long term capital gains

DC

tell if automatic or discretionary and if expansionary or contractionary: the goverment rasises coportate icome tax rates

DC

tell if automatic or discretionary and if expansionary or contractionary: the governemnt rises social security taxes

DC

tell if automatic or discretionary and if expansionary or contractionary: the government eliminates the dedeuctability of interest expense for tax purposes

DE

tell if automatic or discretionary and if expansionary or contractionary: the government gives all its employees a large pay raise

DE

tell if automatic or discretionary and if expansionary or contractionary: the government lauches a major new space program to explore mars

both show full employment level of output and long run producation capacity

what is the similarity between LRAS and PPF

it would increase

what would happen if we spent a lot of money for national income

false; AS NOT AD... has to do with the PPC

when the economy experiences an increase in AD< it will discover that its PPC has shifted outward

false; stagflation

when unemployment rises, the price level falls. when it falls price level rises. it is impossible to have a eising price lelvel with rusing unemployment

investment to decrease

whenever we are in a recession we can expect: a. investment to decrease b. unem to be low c. incomes increase d. all the above e. none of the above

decreases

numerical value of investment and gov spending multiplier increases as MPS does what

false; flexible

our economy is able to adjust to a long run equilibrium afer a decrease in AD bc prices and wages are sticky

full employment

peoduction in the long run=

APC is the average, while MPC is the change

what is the difference between APC and MPC

1/MPS

what is the investment/government spending multiplier formula

inverse

what is the relationship between price level and real gdp on the AD curve

true

AD slopes downward wealth effect decreases, PL increases, value of money holdings and consumer spending increase

an increase in consumer confidence

11. Which of the following will cause the aggregate demand to shift right? (A) An increase of consumer confidence (B) A reduction in the wealth or assets held by consumers (C) An expectation of future declines in business revenues (D) An expectation of future surpluses of essential consumer goods (E) A growing belief that personal income will decline in the future

buisness becoming optimistic with repsct to future buisness conditons

12. The investment demand curve will shift to the right as the result of (A) excess productive capacity. (B) an increase in corporate business taxes. (C) businesses becoming more optimistic with respect to future business conditions. (D) recessions in foreign nations that trade with the United States, causing a lower demand for U.S. products. (E) a decrease in the real interest rate.

D

13. Automatic stabilizers in the economy include which of the following? I. A progressive personal income tax II. Unemployment compensation III. Congressional action that increases tax rates (A) I only (B) II only (C) III only (D) I and II only (E) I and III only

B

15. The balanced-budget multiplier indicates that (A) equal increases in government spending and taxation will make a recession worse. (B) equal increases in government spending and taxation will increase total spending. (C) government deficits might have a contractionary impact on the economy. (D) supply will necessarily create its own demand. (E) the level of gross domestic product is never less than the level of disposable income.

D

19. If the primary goal is to reduce inflation, which of the following fiscal policy actions would be appropriate during a period of a rapidly increasing consumer price index? I. Reduce government expenditures for defense and space research. II. Increase transfer payments to those most severely affected by the rising price index. III. Increase personal income tax rates. (A) I only (B) II only (C) III only (D) I and III only (E) II and III only

real balances effect

20. As the average price level decreases, the purchasing power of people's cash balances increases. This results in an increase in spending. This effect is called (A) the Laffer effect. (B) the Keynesian effect. (C) the money illusion effect. (D) the real-balance effect. (E) the neutrality of money.

C

21. A severe, sustained increase in oil prices would most likely cause short-run and long-run aggregate supply curves and the production possibilities curve to change in which of the following ways? (A) Decrease, No change, Shift outward (B) Decrease, Decrease, Shift outward (C) Decrease, Decrease, Shift inward (D) Increase, No change, No change (E) Increase, Increase, Shift inward

B

22. A decrease in lump-sum personal income taxes will most likely result in an increase in real GDP because which of the following occurs? I. Government spending decreases to maintain a balanced budget. II. Consumption spending increases because disposable personal income increases. III. Investment spending decreases because disposable personal income increases. (A) I only (B) II only (C) III only (D) I and III only (E) I, II and III

E

23. A rapid increase in successful research and development projects for the nation will most likely result in which of the following changes in the short-run and the long-run aggregate supply curves and the production possibilities curve? (A) Decrease, No change, No change (B) Decrease, Decrease, Shift inward (C) Increase, No change, Shift inward (D) Increase, Increase, No change (E) Increase, Increase, Shift outward

E

26. One of the reasons the aggregate demand curve is downward sloping is that as the value of cash balances decreases, aggregate spending decreases. This is called (A) a positive externality. (B) a negative spillover. (C) the Pareto effect. (D) the substitution effect. (E) the real-balance effect.

D

27. If there is a decrease in the short-run aggregate supply curve and no changes in monetary and fiscal policies are implemented, the economy over time will (A) remain at the new price and output level. (B) continue to have rising prices and decreasing real GDP. (C) experience increasing nominal wages. (D) return to the original output and price level. (E) experience a leftward shift in the aggregate demand curve

prices of inputs decreases

3. The short-run aggregate supply curve will shift to the right when (A) energy prices increase. (B) government regulation increases. (C) prices of inputs decrease. (D) investment spending decreases. (E) productivity rates decrease.

c) increase no change

4. A rightward shift in the aggregate demand curve with a horizontal aggregate supply curve will cause employment and the price level to change in which of the following ways? (Employment Price Level) (A) Increase Increase(B) Increase Decrease(C) Increase No change(D) Decrease No change(E) No change No change

LRAS shift rightward

5. An increase in the capital stock will cause the (A) aggregate demand curve to shift leftward. (B) production possibilities curve to shift in. (C) Phillips curve to shift out. (D) long-run aggregate supply curve to shift rightward. (E) consumption function to shift down.

decrease in personal income taxes

6. Which of the following is a fiscal policy that would increase aggregate demand in the Keynesian model? (A) A decrease in personal income taxes (B) A decrease in government spending (C) An increase in corporate income taxes (D) A purchase of government bonds by the Federal Reserve (E) A sale of government bonds by the Federal Reserve

AD decreases. taxes increase. goverment spending decreases. surplus. decreased national income

AD? TAxes? gov spending? deficit or surplus? national income?: buisness sales and investment are expanding rapidly and economists think strong inflation lies ahead

AD decreases. taxes increase. goverment spending decreases. surplus. decreased national income

AD? TAxes? gov spending? deficit or surplus? national income?: inglation is strong at rate of 14 percent per year

AD increases. taxes decreases. increases governemnt spending. deficit. increases national income

AD? TAxes? gov spending? deficit or surplus? national income?: national unemployment ruses to 12 percent

AD increases. taxes decreases. increases governemnt spending. deficit. increases national income

AD? TAxes? gov spending? deficit or surplus? national income?: surveys show consumers are losing confidence in the economy, retials sales are weak and buisness invetories are increasing rapidly

expansionary

Expansionary or Contractionary? Government cuts personal taxes and increases its own spending

contractionary

Expansionary or Contractionary? Government reduces wages of its employees while raising taxes on consumers and buisnesses. other spending remains the same

expansionary

Expansionary or Contractionary? Government spending goes up while taxes remain the same

contractionary

Expansionary or Contractionary? gov increases income tax, social security tax, and coporate income tax, while spending satys the same

100% or 1

MPC + MPS is always equal to what

change C/ change DI

MPC =

change s/change DI

MPS=

true

T or F: fluctuations in economy are often called buisness cycles

true

T or F: keynes advocated to increase AD when eocnomy is weak

false

T or F: offbeat indicators include GDP, inflation, unemployment

true

T or F: real GDP variable commonly used to monitor short run changes in economy bc most comprehensive measure of economic activity

true

T or F: when real GDP decreases, unemployment rate increases

real balance effect

The change in the purchasing power of dollar-denominated assets that results from a change in the price level.

interest rate effect

The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).

consumer wealth

a chnage in which of the following will causes AD to shift? a) energy prices B) producvity tates c) consumer wealth d) prices of inputs

loanable funds market

a hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders

AS

a schedule indicating the level of real output that will be produced at rach possible price level

interest sensitive expenditures

buying products dependent upon cost of money

AS decreases bc campical good is decreasing... a decrease in technology

an insidious computer virus causes all IBM computers in the US to crash

C/DI

apc formula

S/DI

aps formula

true

automatic stabilizers incdelue out progressive taxes and unemployment benefits

downward pressure

contractionary gap = _____________ pressure on wages

false

crowding out will occur if gov increases spending which decreases IR and increases AD

wealth effect or real balance effect

effect in which PL decreases, real GDP increases bc consumers buy more

net export effect

effect in which conpetition pushes price level down which means we consimer more which means real GDP increases

upward pressure on wages

expansionary gap = ____________ pressure on wages

false

fiscal polciy is how gov increases or decreases IR

false

government can maintain longrun output above the max level of output by increasing AD

spending more than you have

how can savings be negative

false

if policy makers try to get economy out of recessiom, shoulf use policy tools to decrease AD

dalse AS has + slope

if we are in a recession as long as a wecontinue to increase AD we can achieve full employment without druving up inflation

true

if we assume operating on horizontal SRAS, equilibrium level od real GDP/year is completing determined by changes in AD

false

in keynsian short run (horizontal part of SRAS) an increase in AD will increase PL and real GDP

false

in recession, economy will adjust to long run equilibriu on its own as wages rises

false; inflation

in the long run, when nominal wages increases, everyone has more to spend; therefore, the economy as a whole benefits

true

increase price of oil tends to cause stagflation

stagflation = dual policy

inglation persists while uneployment stays high

true

investment is volatile component of spending across buisness cycle

AD/AS model

model that shows short run fluctuations around long run trend

false; full employment

regardless of our current economic situation, an increase in aggeragate demand will always create new jobs

false... wil decrease AD

stronger AD will increase AD

-MPC/MPS

tax multiplier formula

AE

tell if automatic or discretionary and if expansionary or contractionary: as a result of recession, more families qualify for food stamps and welfare benefits

AC

tell if automatic or discretionary and if expansionary or contractionary: croporate profits increase; as a result government collects more corporate income taxes

DE

tell if automatic or discretionary and if expansionary or contractionary: gov cuts personal taxes

national income decreases

what happens to national income as people save more

increased AD

the federal government lnches a major new highway construction program

increase AS

there is a 25 percent decrease in the price of crude oil

Increased AS

there is an increase in worker productivity

savings; borrowing

what does S represent in LF? D?

AD decreases; bc we can now buy more foreign goods the demand for domestic goods decreases

what happens to AD bc of appreciation of money? explain

remains constattn

what happens to MPC as income rises

remains constat

what happens to MPS as income rises

decreases

what happens to apc as DI rises

ppl need more money leading to increase IR so firms borrow more and investment decreases

which occurs when PL increases: a consumers welath increases C b. ppl need more money so IR increases so firms borrow more so investment decreases c. vvalue of dollar increases on foreign exchange market d. gove responds to higher taxes by reduces its purchases

new law that requires gov to cover med costs for elderly

which would ccause AD to shift right: a. new law that requires gov to cover med costs for elderly b. wave of peesimism, c. higher RIR d. stock market crashes

bc PL does not affect it

why is LRAS vertical

decrease

will price level increase or decrease for the stronger dollar