Ch. 13 & 16

A recessionary gap is a gap that exists when potential GDP​ _____ real GDP and that brings a​ _____ price level. An inflationary gap is a gap that exists when real GDP​ _____ potential GDP and that brings a​ _____ price level.

exceeds; falling; ​exceeds; rising

An automatic fiscal policy is a fiscal policy action that is triggered by​ _____. A discretionary fiscal policy is a fiscal policy action that is initiated by​ _____.

the state of the​ economy; an act of Congress

The U.S. economy is at full employment when the following events​ occur: 1. A deep recession hits the world economy. 2. The world oil price rises by a large amount. 3. U.S. businesses expect future profits to fall.

A deep recession in the world economy decreases foreign income. U.S. exports will​ decrease, and U.S. aggregate demand decreases. A rise in the world oil price makes​ firms' costs increase. U.S. aggregate supply decreases. A fall in expected future profits decreases the investment that firms plan to undertake now and decreases aggregate demand.

If potential GDP is​ $600 billion, the economy is​ _______. A.below full employment and has a recessionary gap B.above full employment and has an inflationary gap C.at a​ full-employment equilibrium

B.above full employment and has an inflationary gap

In the long​ run, ______. A.potential GDP increases to​ $800 billion B.aggregate supply decreases and aggregate demand​ decreases, the price level either rises or​ falls, and real GDP decreases to potential GDP C.aggregate demand​ decreases, the price level​ falls, and real GDP decreases to potential GDP Your answer is not correct. D.aggregate supply​ decreases, the price level​ rises, and real GDP decreases to potential GDP

D. aggregate supply​ decreases, the price level​ rises, and real GDP decreases to potential GDP

Explain the effect of each event on real GDP and the price level in the short run.

Event 1 decreases real GDP and lowers the price level Event 2 decreases real GDP and raises the price level Event 3 decreases real GDP and lowers the price level

Which of the following statements illustrates fiscal policy​?

Fiscal policy includes changing​ taxes, transfer​ payments, and government expenditure on goods and services. The US government has proposed a hike in the corporate tax rate.

The economy is in a boom and the inflationary gap is large. Discretionary fiscal policy that might occur is​ ______.

a decrease in government expenditure and an increase in taxes

In the short​ run, when fuel prices rose ​India's aggregate supply​ ______.

decreased

In the short​ run, when the price level in India increased​ India's aggregate supply​ ______.

didn't change, but the quantity of real GDP supplied increased

In the short​ run, when U.S. firms moved their IT and data functions to​ India, India's aggregate supply​ ______. A.decreased because more of​ India's workers are now employed by U.S. firms B.increased C.​didn't change, but U.S. aggregate supply increased D.​didn't change, but a higher price level brought an increase in the quantity of real GDP supplied E.became part of U.S. aggregate supply

increased As U.S. firms moved their IT and data functions to​ India, real GDP supplied at the current price level increased. The AS curve shifted rightward.

Suppose that the U.S. government increases its expenditure on highways and bridges by​ $100 billion. As a result of this​ expenditure, aggregate demand​ ______. If the economy is in a​ recession, real GDP​ _______.

increases by more than​ $100 billion because consumption expenditure increases in a multiplier​ process; increases

Aggregate demand decreases if the exchange rate​ ______ or foreign income ​______. Aggregate demand decreases if monetary policy​ ______ the quantity of money and​ ______ interest rates. Aggregate demand decreases if fiscal policy​ ______ taxes or​ ______ transfer payments. Aggregate demand decreases if expected future​ income, inflation, or profits​ ______. And aggregate demand decreases if fiscal policy​ ______ government expenditure.

increases; decreases decreases; increases increases; decreases decreases; decreases

The BEA announced that demand for durable goods rose​ 3.4% while​ new-home sales rose​ 13.4% in the second quarter of 2013. U.S. exports increased​ 5.4% while U.S. imports increased​ 9.5%. The increase in the demand for durable goods​ ______ aggregate demand. The increase in​ new-home sales​ ______ aggregate demand.

increases; increases The quantity of real GDP demanded is the sum of real consumption​ expenditure, investment, government expenditure on goods and​ services, and exports minus imports. The rise in U.S. imports exceeds the rise in U.S.​ exports, which decreases the demand for​ U.S.-produced goods and services and decreases U.S. aggregate demand.

Aggregate demand is the relationship between the quantity of​ _____ demanded and the​ _____ when all other influences on expenditure plans remain the same.

real​ GDP; price level

Aggregate supply is the relationship between the quantity of​ _____ supplied and the​ _____ when all other influences on production plans remain the same.

real​ GDP; price level

When a tax is applied to labor​ income, the result is a​ ______ quantity of labor and a​ ______ potential GDP.

smaller; lower When a tax is applied to labor​ income, the supply of labor curve shifts leftward. The equilibrium quantity of labor decreases. As the equilibrium quantity of labor​ decreases, a movement occurs leftward along the production function and potential GDP decreases.