ECO 182: Exam 2
39 Cards in this Set
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In the classical model, an increase in the unemployment rate
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will likely be temporary.
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According to the traditional Keynesian analysis, if the government increases spending by $10 million, then
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consumption will increase, and so total expenditures will increase by more than $10 million.
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Fiscal policy may end up being destabilizing to an economy because
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various time lags associated with fiscal policy cause the policy changes to take effect too late
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Suppose that the government of Summerfield spends $2 trillion in 2013 and receives tax revenues
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Summerfield has a budget deficit of $0.5 trillion.
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According to the Keynesian approach, an increase in taxes
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will reduce consumption by an amount less than the change in taxes
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According to the interest rate effect, an increase in the price level, if other factors are held constant,
will lead to
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an increase in the real interest rate
or
a reduction in total real spending on interest—rate—sensitive goods
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There is a distinction between the long-run aggregate supply (LRAS) curve and the short-run
aggregate supply (SRAS) curve. ln the long run,
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all adjustments to changes in the price level have been made, but in the short run all changes
in the price level do not occur.
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Keynes and his followers believed that
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there was no guarantee that a capitalist economy would reach a full employment equilibrium.
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Are federal budget deficits related to trade deficits?
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Yes. As deficit spending goes up, i.t is likely government borrowing will, too. Then foreign
residents who lend funds to the U.S. government have less to spend on our goods, so U.S.
exports will fall.
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Given the assumptions of the classical model
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the market is a self—correcting mechanism.
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To the extent that the political process of moving legislation through Congress is slow
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the action time lag will be long
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The long-run aggregate supply curve
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indicates the level of output (GDP) that occurs when resources are fully employed.
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In the classical model, real Gross Domestic Product (GDP) per year is
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supply determined
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The advantage of automatic stabilizers is that they
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reduce the fluctuations in the business cycle
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Which of these questions does aggregate demand help us answer?
I. What determines the total amount of our output that individuals, firms, governments and
foreigners want to buy?
ll. What is the economy's long—run real Gross Domestic Product (GDP)?
lll. What determines the econo…
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I. What determines the total amount of our output that individuals, firms, governments and
foreigners want to buy?
ll. What is the economy's long—run real Gross Domestic Product (GDP)?
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If the net public debt declined last year, then which of the following most likely occurred during that year?
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The government experienced a budget surplus
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Which of the following will result in secular deflation?
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Continuous rightward shifts of the long-run aggregate supply curve.
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According to the classical model, more saving leads to more investment because
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the interest rate adjusts to keep investment equal to saving
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If the economy is near full capacity, the effect of a negative aggregate demand shock is to
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cause the price level to fall.
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According to Keynes, involuntary unemployment is possible because of
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long—term labor contracts and the existence of labor unions
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Suppose the economy is initially experiencing a recessionary gap. A reduction in the size of
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an increase in the size of the recessionary gap and decrease in real GDP.
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if the price level kept increasing, the short—run aggregate supply (SRAS) curve would get steeper because
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there are limits to how long workers can work long hours and capital can go without proper
maintenance.
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An individual holds $10,000 in a non—interest—earning checking account, and the overall price level
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the individual's real wealth to decrease and consumption to decline.
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The government might engage in expansionary fiscal policy if it wanted to
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reduce the level of unemployment.
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In the short run, real GDP can increase beyond a level consistent with the long—run growth path
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existing capital and labor are used more intensely
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Over the last twenty years, real GDP in the U.S. economy has increased and there has been inflation. This indicates that
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aggregate demand has increased more than aggregate supply.
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Other things being equal, appreciation of the dollar
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decreases aggregate demand in the United States, and may increase aggregate supply by
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All of the following are possible explanations for the increase in U.S. government budget deficits as a percentage of GDP since the early 2001 EXCEPT
A) increases in government spending.
B) increases in tax revenues.
C) increases in payments for entitlements.
D) decreases in tax ra…
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B) increases in tax revenues.
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What is the short—run effect of increased deficit spending on an economy experiencing a recessionary gap?
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Aggregate demand increases, and the gap closes
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According to the classical model, the income generated by production is
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enough to purchase all the goods and services produced
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Suppose the economy is experiencing a recessionary gap at the current level of GDP. Which of the fiscal policy actions would be most appropriate given this recessionary gap?
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decreasing taxes
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An advantage of automatic stabilizers over discretionary fiscal policy is that
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automatic stabilizers are not subject to the same time lags as discretionary fiscal policy
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In the short run, an increase in the price level induces firms to expand production because
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prices of inputs are held constant, so the higher prices for firms products imply that it is profitable to expand production.
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Which of the following will cause a leftward shift in the aggregate demand curve?
A. A reduction in money supply
B. In an increase in taxes
C. A reduction in the government spending
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All of them
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If the economy is operating on the LRAS curve, the Expansionary Fiscal policy will
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generate an increase in real GDP and higher prices in the short run, but then real GDP will decrease to its long-run level, and the price level will increase some more
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When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising
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a discretionary fiscal policy
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If the government increases spending while holding taxes constant, we expect
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interest rates to rise
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A new discovery of large volumes of previously unknown deposits of natural gas in Pennsylvania would
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shift the short-run and long-run aggregate supply curve to the right
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What are 3 automatic fiscal stabilizers?
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An increase in unemployment expenditures during a recession
A decrease in unemployment compensation payments during an expansion
A decrease in overall tax revenues during a recession
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ECO 182: Exam 2