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