Fiscal Policy Test Review

AD/AS If the SRAS shifts right, what will happen to income and employment? In this case, income and employment will both increase. This is because output or GDPr goes up, causing u% to go down or employment to go up. As more people have jobs, income goes up as well.

AD/AS In an economy with completely flexible wages, an increase in labor productivity will change output and real wages in which way? The increase in labor productivity will shift the SRAS to the right, thus increasing output or GDPr, decrease u%, and increase real wages (more people earn incomes and the PL goes down). Push the Space Bar to check your answer.

AD/AS Stagflation is most likely caused by what type of shift involving AD or AS? A leftward shift or decrease in SRAS. This is usually a result of a negative supply shock such as an increase in oil prices, an increase in wages due to labor union negotiations, or monopoly/oligopoly situations which increase prices and limit output.

AD/AS An increase in personal income taxes will most likely cause AD and AS to change in which of the following ways? AD AS No change Decrease No change Increase Decrease No change Decrease Increase Increase No change C. AD will decrease as personal consumption goes down. AS will be unaffected.

AD/AS When companies restructure their operating costs to decrease production costs, the AS curve, PL, and real output will change in which ways? The AS shifts right, the PL goes down, and real output (real GDP) goes up.

Simultaneous Shifts If government spending declines while at the same time input costs decline, what would happen to the PL and GDPr (real GDP)? The increase in G would cause AD t0 decrease and shift leftward causing the PL and GDPr to decrease. AS would shift rightward due to lower costs of production. This would decrease the PL and increase GDPr. As such, overall, the PL would decrease and GDPr is indeterminate.

Simultaneous Shifts If personal taxes are cut while at the same time productivity decreases, what would happen to the PL and GDPr (real GDP)? AD would increase and shift rightward causing the PL and GDPr to increase. AS would shift leftward due to lower output because of decreased productivity. This would increase the PL and decrease GDPr. As such, overall, the PL would increase and GDPr is indeterminate.

AD/AS and Fiscal Policy A decrease in labor productivity will shift which curve in which direction (AD or AS)? The AS curve to the left.

AD/AS and Fiscal Policy Which of the following would cause the SRAS to shift to the right? An increase in the wage rate. An increase in the real interest rate. An increase in the natural rate of unemployment. A decrease in the capital stock. A decrease in the expected price level. E. This would cause firms to produce more now to take advantage of the currently higher prices.

AD/AS and Fiscal Policy A decrease in business taxes would lead to an increase in national income by increasing which of the following: The money supply Unemployment AD AS AD and AS E. Both AD and AS. However, AD would change first. Investment must come first before AS can increase. Companies must invest in new plant/equipment/technology first before seeing the benefits to increase AS

AD/AS and Fiscal Policy In order to fight recession, what tools would be used for fiscal policy and how would they be used? Decrease taxes, increase government spending, or do a combination of both.

AD/AS and Fiscal Policy “Crowding Out” refers to a decrease in what? Investment spending due to increased interest rates caused by government deficit spending to fight recession.

Fiscal Policy Suppose that the marginal propensity to consume is 0.90. What is the value of the government spending multiplier? If a recessionary gap equals $500 Billion, how much should G increase to close the gap? Multiplier = 10; G needs to increase $500 Billion divided by 10 or $50 Billion.

Fiscal Policy Suppose that the marginal propensity to consume is 0.90. If government spending increases by $30 Billion and Exports decrease by $10 Billion, what is the overall effect on GDPr? Multiplier = 1/1-MPC or 10; 10 x ($30 Billion minus $10 Billion) = 10 x $20 Billion or $200 Billion .

Fiscal Policy If the federal government reduces its budget deficit when the country is close to full employment, which is most likely to result? Inflation increases. Tax revenues increase Interest rates decrease Unemployment will decrease The international value of the dollar will increase. C. Interest rates will decrease due to the reduced demand for loanable funds by the government. To run a budget deficit, the government will reduce its demand for loanable funds. Tax revenues may or may not increase.

Fiscal Policy If the MPC equals .75, what is the value of the Tax Multiplier for a tax increase? If the inflationary gap is $500 Billion, how much should taxes increase to close the gap? The Multiplier = -MPC/1-MPC or -3; Taxes need to increase by $500/-3 or $166.67B to close the gap.

Fiscal Policy If the marginal propensity to consume is .8, a $100 Billion increase in government spending will cause a maximum increase in output of ________________. The multiplier is 1/1-MPC or 5. 5 x $100 B = $500 Billion

Fiscal Policy An equal increase in government spending matched by an equal increase in taxes will cause what changes to AD, real GDP, the price level, and the unemployment rate. This will increase AD, real GDP, and the PL, while decreasing u%. This is a balanced budget multiplier question. The balanced budget multiplier = 1. An equal increase in G financed by and equal increase in T results in a change in AD equal to the increase in G because taxes affect circular flow faster than taxes.

Weaknesses The time it takes to recognize that a recession is occurring and and promote solutions is known as the _____________ lag. Inside

Weaknesses The time it takes for the government to take action to solve the problem is know as the _____________ lag. Outside

Weaknesses Using Fiscal Policy for political gain is known as _________________. Political Motivation

This type of inflation is caused by excessive AD. Demand-Pull

Inflation This type of inflation is caused by Negative Supply Shocks (like high energy costs) which raise per-unit production costs. Cost-Push

Stagflation/AS to the left Inflation The common name for Cost-Push inflation is ____________. This results in a shift of the ___ to the _____. Stagflation/AS to the left

GDP What is the formula for the expenditures method for calculating GDP? C + IG + G + Xn

Foreign Exchange What factors could cause the U.S. $ to appreciate? An increase in U.S. real interest rates, a decrease in U.S. price level, and an increase in the income/wealth of the U.S.’s trading partners.

Into the U.S., causing the dollar to appreciate. Foreign Exchange If the real interest rate in the U.S. increases relative to the rest of the world, then capital should flow _______________ causing the dollar to ___________________. Into the U.S., causing the dollar to appreciate.

Foreign Exchange What would cause the U.S. dollar to depreciate relative to the euro? An increase in household income in the U.S. An increase in interest rates in the U.S. An increase in household income in Europe. A decrease in interest rates in Europe. A decrease in the U.S. price level. A. This would cause Americans to buy more European imports, causing the euro to appreciate and dollar to depreciate.