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