Ch 16 Review – Econ 110 – Flashcards
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Fiscal policy refers to changes in
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federal taxes and purchases that are intended to achie ve macroeconomic policy objectives
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Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from
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CtoB
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If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in
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government purchases
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If the tax multiplier is-1.5 and a $200 billion tax increase is implemented, what is the chang e in GDP, holding everything else constant?
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a $300 billion decrease in GDP
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The government purchases multiplier equals the change in ________ divided by the change in ________.
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equilibrium real GDP; government purchases
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In the graph above, the shift from AD1toAD2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B ________ $50 billion
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would be greater than
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An increase in taxes would be depicted as a movement from ________, using the static AD-AS model in the figure above
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BtoA
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Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a movement from ________ using the static AD-AS model in the figure above
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CtoB
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Tax cuts on business income ________ aggregate demand
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would increase
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Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from
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A to B
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Tax cuts on business income increase aggregate demand by increasing
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business investment spending
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Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP
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Real equilibrium GDP will rise
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The multiplier effect refers to the series of
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induced increases in consumption spending that result from an initial increase in autonomous expenditures.
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The tax multiplier equals the change in ________ divided by the change in ________.
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A) equilibrium real GDP; taxes
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An increase in government purcha ses will increase aggregate demand because
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government expenditures are a component of aggregate demand.
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If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy
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an increase in taxes
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Which of the following would not be considered an automatic stabilizer
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legislation increasing funding for job retraining passed during a recession
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Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________
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higher; higher
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Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant
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increase in inflation.
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Expansionary fiscal policy
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can be effective in the short run
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Congress and the president carry out fiscal policy through changes in
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Government purchases and taxes
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The aggregate demand curve will shift to the left ________ the initial decrease in government purchases
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by more than
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Crowding out refers to a decline in ________ as a result of an increase in ________
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private expenditures; government purchases
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Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from
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AtoB
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Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to potential GDP, Congress should
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ower government purchases by an amount less than $200 billion
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Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________
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lower; lower
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Which of the following is an objective of fiscal policy
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high rates of economic growth
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Which of the following would be classified as fiscal policy
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The federal government cuts taxes to stimulate the economy
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Expansionary fiscal policy involves
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increasing government purchases or decreasing taxes
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Fiscal policy is determined by
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Congress and the president
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Which of the following is considered contractionary fiscal policy?
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Congress increases the income tax rate
