Fiscal Policy

Which of the following policies involves decreasing government purchases and/or increasing taxes?

A contractionary fiscal policy

Which is a frequently used tool of fiscal policy?

Changes in government purchases.

This policy involves increasing government purchases and/or decreasing taxes.

Expansionary fiscal policy

Characteristics that are built-in to help stabilize prices and output are associated with

automatic stabilizers

The short-term fluctuations experienced in an economy due to changes in the levels of economic activity refers to the

business cycle

Active fiscal policy calls for reducing government purchases in case of:

demand-pull inflation.

Changes in government purchases and/or taxes designed to achieve full employment and low inflation is called:

fiscal policy.

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment is called:

full-employment GDP.

If the economy is experiencing a recession, the goal of fiscal policy will be to:

increase aggregate demand.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $100 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.80, government purchases would need to:

increase by $20 billion.

The concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP is called the

multiplier effect