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Ch 16 Review – Econ 110

Fiscal policy refers to changes in
federal taxes and purchases that are intended to achie
ve macroeconomic policy objectives
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
CtoB
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
government purchases
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?
a $300 billion decrease in GDP
The government purchases multiplier equals the change in ________ divided by the change in ________.
equilibrium real GDP; government purchases
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
would be greater than
An increase in taxes would be depicted as a movement from ________, using the static AD-AS model in the figure above
BtoA
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
CtoB
Tax cuts on business income ________ aggregate demand
would increase
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
A to B
Tax cuts on business income increase aggregate demand by increasing
business investment spending
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
Real equilibrium GDP will rise
The multiplier effect refers to the series of
induced increases in consumption spending that result from an initial increase in autonomous expenditures.
The tax multiplier equals the change in ________ divided by the change in ________.
A) equilibrium real GDP; taxes
An increase in government purcha
ses will increase aggregate demand because
government expenditures are a component of aggregate demand.
If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate
fiscal policy
an increase in taxes
Which of the following would not be considered an automatic stabilizer
legislation increasing funding for job retraining passed during a recession
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 ________
higher; higher
Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant
increase in inflation.
Expansionary fiscal policy
can be effective in the short run
Congress and the president carry out fiscal policy through changes in
Government purchases and taxes
The aggregate demand curve will shift to the left ________ the initial decrease in government purchases
by more than
Crowding out refers to a decline in ________ as a
result of an increase in ________
private expenditures; government purchases
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
AtoB
Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to potential GDP,
Congress should
ower government purchases by an amount less than $200 billion
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 ________
lower; lower
Which of the following is an objective of fiscal policy
high rates of economic growth
Which of the following would be classified as fiscal policy
The federal government cuts taxes to stimulate the economy
Expansionary fiscal policy involves
increasing government purchases or decreasing taxes
Fiscal policy is determined by
Congress and the president
Which of the following is considered contractionary fiscal policy?
Congress increases the income tax rate

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