Chapter 11

An automatic stabilizer is

an element of fiscal policy that automatically changes in value as real GDP changes.

Increased budget deficits

can cause interest rates to increase and hence decrease net exports

Which of the following is true about automatic stabilizers?

is any program that responds to fluctuations in the business cycle in a way that moderates the effects of those fluctuations.

If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things equal, an increase in government spending will

raise the price level and leave real GDP unchanged.

Budget deficits tend to grow during recessions because

real GDP growth is negative, which reduces tax receipts in relation to government expenditures

Assuming no effects on aggregate supply, if the government increases government spending and decreases taxes in an attempt to prevent a possible recession, aggregate demand will shift to the ____, the price level will either remain constant or ____, and the level of real GDP will ____.

right; increase; increase

A drop in investment spending caused by increased government budget deficits is referred to as

Crowding out

Ceteris paribus, if the U.S. federal government reduces its budget deficit which of the following will be observed?

The aggregate demand curve will shift to the left.

Which of the following is not a means to finance government spending?

Government subsidies

Which of the following can be considered as an automatic stabilizer in the economy?

Unemployment insurance

Suppose the short-run equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and price level. This can be accomplished by:

decreasing government spending such that aggregate demand is reduced.

The Ricadian Equivalence implies that when financing additional government expenditures

here is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will decrease either way.

If the government wants to close a GDP gap, it can:

increase its budget deficit

Discretionary fiscal policy is best defined as:

the deliberate change in tax laws and government spending to change equilibrium income.

The term fiscal policy refers to

the use of government spending and taxation to influence the level of economic growth and inflation.