ECN 204 Chapter Notes - Chapter 13: Refinancing, Human Capital, Business Cycle

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greensheep522

7 Nov 2016

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Ecn204 - chapter 13: fiscal policy, deficits, surpluses, and debt (textbook notes) They do not occur automatically, independent of parliamentary action. Those changes are nondiscretionary (or passive or automatic) Perhaps profit expectations on investment projects have dimmed, curtailing much investment spending and reducing aggregate demand. (disregard the arrows and dashed downsloping line for now. ) Suppose the economy"s potential or full-employment output is billion in figure. If the price level is inflexible downward at p1, the broken horizontal line becomes relevant to the analysis. The aggregate demand curve moves leftward and reduces real gdp from billion to billion. A negative gdp gap of billion (= billion billion) arises. An increase in unemployment accompanies this negative gdp gap because fewer workers are needed to produce the reduced output. In short, the economy depicted is suffering both recession and cyclical unemployment.

Related Questions

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume(MPC) is 0.75, and the government follows Keynesian economics by following expansionary fiscal policy to increase aggregate demand (total spending). If an increase in $1000 billion aggregate demand can restore full employment, the government should:

a. increase spending by $250 billion.

b. decrease spending by $750 billion.

c. increase spending by $1000 billion.

d. increase spending by $750 billion.

yelloweagle292

Refer to the table given below. Suppose that aggregate demand increases such that the amount of real output demanded rises by $15 billion at each price level.

Real Output Demanded (Original)	Price Level	Real Output Supplied
$500	112	$515
505	106	512
510	100	510
515	94	507
520	88	500

a.) By what percentage will the price level increase? _______ percent

b.) Will this inflation be demand-pull inflation or will it be cost-push inflation? (Click to select) Cost-push inflation or Demand-pull inflation

c.) If potential real GDP (that is, full-employment GDP) is $510 billion, what will be the size of the positive GDP gap after the change in aggregate demand? $ _______ billion

d.) If the government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it? (Click to select) (Increase or Decrease)

viridianmuskrat41

5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending.

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. no change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______ investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decrease

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ECN 204 Chapter Notes - Chapter 13: Refinancing, Human Capital, Business Cycle

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