Stabilization Policy Review. Name:_______________________ Starting Point:1. Draw a macroeconomy in long run equilibrium. 2. Suppose an event occurs that shocks the economy out of long run equilibrium. If this occurs because of a shift of the AD curve it is called _________________________. If this occurs because of a shift of the SRAS curve it is called______________________. 3. Draw a macroeconomy experiencing a recessionary output gap. (Include the AD/AS model and Business Cycle with an arrow pointing to the appropriate place the economy is in.)What can information can we gather from the graphs above about:Output:Real GDP:Employment:Aggregate Price Level:4. Draw a macroeconomy experiencing an inflationary output gap. (Include the AD/AS model and Business Cycle with an arrow pointing to the appropriate place the economy is in.)What can information can we gather from the graphs above about:Output:Real GDP:Employment:Aggregate Price Level:1Stabilization Policy Review. Name:_______________________ Pivotal Events & Effects of Automatic Stabilizers:5. Read each scenario below. Decide how each affects the AD/AS model and identify if economists give such a situation a specific name. (Make sure to include if the scenario results in an output gap and the initial effects on output, GDP, Employment and APL). a. The price of commodities increases by 10% this year. b. The price of oil falls.c. Labor unions successfully negotiate an increase in nominal wages for their workers. d. The supply of unsold houses in an economy increases by 20%e. There is an increase in labor productivity due to increases in human capital. f. An increase in the money supply causes interest rates to fall. 2Stabilization Policy Review. Name:_______________________ g. The government increases spending in order to finance a war. h. The real value of household assets fall. i. There is an increase in spending on domestic goods and services. j. The level of investment in the country rises because there is more incentive to invest in the economy. k. Workers in the economy become less productive. l. The government decreases the taxes charged to businesses.3Stabilization Policy Review. Name:_______________________ m. The economy experiences a technology boom and there is an increase in useful physical capital. 6. Suppose the macroeconomy is in a recession due to a negative demand shock. Explain one way the economy canautomatically stabilize. Draw a graph of this below. What are the effects of this on output, employment, and aggregate price level?7. Suppose the macroeconomy is in an expansion due to a positive supply shock. Explain one way the economy can automatically stabilize. Draw a graph of this below. What are the effects of this on output, employment, and aggregate price level?___________________________________________________________________________________________Fiscal Policy & Effects8. What are the three most common policy tools of the government?a. b. 4Stabilization Policy Review. Name:_______________________ c. 9. All three of the above tools affect which curve? Why not the other curves?10. Explain how the policy tools above actually shift the curve. 11. Increasing AD to move the economy toward full employment is called:___________________________.12. Decreasing AD to decrease inflationary pressures is called :____________________________. 13. Read the scenarios below and decide what type of fiscal policy is occurring. Explain the reasons for your choice.(how is this actually working to shift the curve?)a. The government cuts business and personal income taxes and increases its own spending.b. The government increases the personal income tax, Social Security tax, and corporate income tax. Government spending stays the same. c. Government spending goes up while taxes remain the same. d. The government reduces the wages of its employees while raising taxes on consumers and businesses. Other government spending remains the same. 5Stabilization Policy Review. Name:_______________________ 14. Suppose an economy is experiencing a recession and the government uses fiscal policy to correct it. Show this ona graph below. List the effects on output, employment, and aggregate price level this policy has on the economy.15. Suppose an economy is experiencing an expansion and inflation and the government uses fiscal policy to correct it. Show this on a graph below. List the effects on output, employment, and aggregate price level this policy has on the economy.16. Read the scenarios below. Fill in the appropriate spaces corresponding to the situation. Fiscal policy cannot provide a solution to one of the scenarios. Objectivefor ADActionon TaxesAction onG(includingTR)Effect onFederalBudgetEffect onNationalDebtNational unemployment rate rises to 12%Inflation is strong at a rate of 14 percent per yearSurveys show consumers are losing confidence in theeconomy, retail sales are weak, and business inventoriesare increasing rapidly6Stabilization Policy Review. Name:_______________________ Business sales and investment are expanding rapidlyand economists think strong inflation lies aheadInflation persists while unemployment stays high.17. Read the scenarios below and indicate whether it represents an automatic (A) or discretionary fiscal policy (D) stabilizer. Then indicate whether it is an example of expansionary (E) or contractionary (C) policy. Economic ScenariosAutomatic( A)/Discretionary (D)Expansionary (E)/Contractionary (C)a. Recession raises the amount of unemployment compensation.b. The government cuts personal income tax ratesc. Incomes rise, as s result, people pay a larger fraction of their income taxes.d. As a result of a recession, more families qualify for food stamps and welfare benefits.e. The government eliminates the deductibility of interest expense for tax purposes.f. The government launches a major new space program to explore Mars.g. The government raises Social Security taxes.h. Corporate profits increase; as a result, government collects more corporate income taxes.i. The Government gives all its employees a large pay raise.18. Explain the following ideas:a. Budget Balance- b. Budget Surplus-c. Budget Deficit-d. Cyclically Adjusted Budget Balance-7Stabilization Policy Review. Name:_______________________ e. Debt-GDP ratio-f. Implicit liabilities.-g. National Debt-19. Explain two reasons to be concerned when the government runs persistent budget deficits. a. b. 20. Explain three options the government