Econ after fiscal

Assume that the full-employment level of output is $1,000 and the price level associated with full-employment output is 100. Also assume that the economy's current level of output is $1,100 and at the price level of 100 current aggregate demand is $1,200. If the government moves the economy back to the full-employment level of output by increasing taxes by $50, then the expenditures multiplier equals

5

Recession

A decline in real output for at least two consecutive quarters.

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net exports = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

A decrease in government purchases and an increase in taxes

Transfer Payment

A payment made by the government that does not require an exchange of economic activity in return. Transfer payments often take the form of payments to households.

expansion

A phase of the business cycle characterized by increasing real GDP, income, and employment.

Progressive Tax

A tax in which the average tax rate increases as taxable income increases (and decreases as taxable income decreases).

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion, (2) investment = $40 billion, (3) government purchases = $90 billion, and (4) net exports = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

An increase in government purchases and a decrease in taxes

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

Automatic

fiscal policy

Changes in government purchases and/or taxes designed to achieve full employment and low inflation.

Which is a frequently used tool of fiscal policy?

Changes in government purchases. Reason: Changes in government purchases and taxation are frequently used tools of fiscal policy.

Consumption (C) + Gross Investment (I) + Government Purchases (G) + Net Exports (NX) characterizes real GDP___

Expenditures

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

Expenditures

Cost-Push Inflation

Inflation that occurs due to a decrease in aggregate supply.

Demand-Pull Inflation

Inflation that occurs due to an increase in aggregate demand.

Loanable Funds

Money that is available in an economy for the private sector and government to borrow.

The most frequently used tools of fiscal policy is changing:

TAXES

Contractionary Fiscal Policy

The application of fiscal policy to decrease aggregate demand; involves decreasing government purchases and/or increasing taxes.

Expansionary Fiscal Policy

The application of fiscal policy to increase aggregate demand; involves increasing government purchases and/or decreasing taxes.

multiplier effect

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

Expenditures Multiplier

The effect that a $1 change in expenditure has on real GDP; calculated as the ratio of the total change in real GDP due to a change in initial expenditure.

Tax Multiplier

The effect that a $1 change in taxes has on real GDP; in the aggregate expenditures model, calculated as the change in output divided by an initial change in taxes.

Marginal Propensity to Save (MPS)

The fraction of each additional dollar of income that is saved.

Marginal Propensity to Consume (MPC)

The fraction of each additional dollar of income that is spent on consumption.

full employment real GDP

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment. Also, the level of real GDP when the economy is in a long-run equilibrium.

Interest Rate

The payment made to agents that lend or save money, expressed as an annualized percentage of the monetary amount lent or saved. Sometimes called nominal interest rate or price of money.

Crowding Out

The process by which an increase in government borrowing results in less borrowing by businesses and consumers for private investment.

Business cycle

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

Implementation Lag

The time between when a policy is enacted and when it has its full effect on the economy.

Recognition Lag

The time between when an event affects an economy and when we recognize that effect in the data collected.

Legislative Lag

The time it takes for policy makers to pass legislation authorizing a new fiscal policy.

During a recession, more people begin to receive unemployment payments, food stamps, Medicaid, and payments from other government programs causing government spending to automatically increase.

True

Unemployment compensation is

an automatic stabilizer because it falls as income increases, slowing an economic expansion.

If government finances fiscal policy through additional borrowing, it could affect the loanable funds market by causing

an increase in the demand and an increase in the quantity supplied for loanable funds.

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

demand-pull inflation.

An increase in transfer payments has an effect on the economy similar to:

explicitly increasing government purchases which is the active fiscal policy prescription for a country in recession.

Government ___ policy has limitations that reduce its effectiveness and may even cause the opposite of what was intended.

fiscal

One of the most frequently used tools of fiscal policy is changing:

government purchases

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

increase aggregate demand.

The lag between the time that the need for fiscal action is recognized and the time action is actually taken is referred to as the

legislative lag

Money that is available in an economy for the private sector and government to borrow is called ___ funds

loanable

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 ___ effect.

multiplier

A decline in real output for at least two consecutive quarters is called a(n)

recession

The time that elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n)

recognition lag.

Contractionary fiscal policy tends to ________ consumption because it may reduce ________

reduce; disposable income.

With demand-pull inflation, active fiscal policy calls for ___ government purchases

reducing

If the economy falls into a recession, automatic stabilizers will cause

tax receipts to fall and government spending to rise.

In the short run, in order to stimulate aggregate demand and avoid falling output and prices, the government could reduce ___

taxes

Which of the following serves as an automatic stabilizer in the economy?

the progressive income tax

The business cycle is:

the short-term fluctuations experienced in the economy due to changes in levels of economic activity.

When income falls, average tax rates fall, which stimulates aggregate demand and reduces ___

unemployment