1. What is the difference between discretionary and
nondiscretionary fiscal policy?
2. What is the cause-effect chain for expansionary and
contractionary fiscal policy?
3. What are the automatic stabilizers?
4. What period is considered the “Golden Age of Fiscal Policy”?
5. What is the “crowding-out” effect?
6. What is the “negative net export effect”?
7. What are the “lags” involved in fiscal policy?
8. What is “Supply-side” economists?
9. What is the Council of Economic Advisers and the
Joint Economic Committee?
Even if I have to dig a
hole and cover it back
up, I do have a job.
Discretionary Fiscal Policy
[“G” & “T”] can be used if
further smoothing is required.
Nondiscretionary Fiscal Policy can take
John Maynard Keynes
“Father of Fiscal Policy”
33% to 50% of the curves out of the business cycle.
[Automatic stabilizers, like welfare and unemploy. insur.]
Peak
Peak
Peak
Peak
Trough
Trough
• This chapter confronts the following questions:
1. Can government spending and tax policies
help ensure full employment?
2. What policy actions will
help fight inflation?
3. What are the roles of government intervention?
• Up until 1915, the federal government
collected few taxes and spent little.
• In 1902, it employed fewer than
350,000 people and spent $650 million.
• Today, it employs nearly 5 million people
and spends more than $3 trillion.
Government Revenue
• Government expansion started with the 16th
Amendment to the U.S. Constitution (1913)
which extended the taxing power to incomes.
• Today, the federal government collects over
$2.6 trillion a year in tax revenues.
AD1
Price Level
AD2
SRAS
LRAS
Recessions
Decrease in AD
PL1
$490
$510
YR
YF
Real GDP
Expansionary Fiscal Policy
[Increase “G” or “decrease “T” w. ME of 4]
Full $20 Billion
Increase in AD
AD1
AD2
LRAS SRAS
Price Level
$5 Billion in
additional
G spending
PL1
$490
$510
YR
YF
Real GDP
[*Use this graph if there is a chg in savings by consumers or chg in fiscal policy]
Real Interest Rate, (percent)
[*Use
the Money Market graph when there is a change in MS]
D1
D2
S
Lenders
Borrowers
r= 8 %
E2
r= 6 %
E1
F1
Use the “real interest rate” with
LFM, because it is long-term.
Use “nominal interest rate” with
money market, as it is short-term.
Starting from a balanced budget, if the
G incr spending or decr T to get out of
a recession, they would now be running
a deficit and have to borrow, pushing
up demand in the LFM and increasing
the interest rate.
F2
Quantity of Loanable Funds
$2.2 T
$2 T
$2 T
G
T
Balanced Budget [G&T=$2 Tr.]
[*Use this graph if there is a chg in savings by consumers or chg in fiscal policy]
Real Interest Rate, (percent)
[*Use
the Money Market graph when there is a change in MS]
S1
D
Borrowers
1
r= 6 %
Lenders
E1
r= 4 %
E2
F1
F2
S2
The following would cause an
increase in supply in the LFM
and lower real interest rates:
1. Fed increases MS
2. HH save more
3. Business save more
4. Government saves more
5. Foreigners save more here
Quantity of Loanable Funds
Demand for Loanable Funds Market
(b)
(a)
Demand for Loanable
Funds at 3%
Business firms demand for
[no G borrowing]
[a lot of investment]
Loanable Funds at
3%
DI
Real
Interest
Rate
S
D1[no G]
3%
A
3%
A
Businesses
LFM
1.5
QID
Trillions of Dollars Trillions of Dollars
Low interest rates, so
- a lot of investment
Demand for Loanable Funds Market
(b)
(a)
With “G” borrowing, the
demand for LF goes to 5%
Government Demand for Funds
D2(G)
Real
Interest
Rate
5%
S
D1[no G]
3%
B
A
5%
3%
LFM
Trillions of Dollars
Business firms demand for
Loanable Funds at 5%
[not as much investment]
Business Demand for Funds
DI
B
A
1.0 1.5
QID2 QID1
Trillions of Dollars
Higher interest rates, so
not as much investment
Balanced Budget [$2 Tril. “G” = $2 Tril. “T”]
Recession $2 Trillion
Incr G to $2.2
$2 Trillion
or
Decr T to $1.8
So expansionary fiscal policy
leads to higher interest rates.
Gonna have
to borrow
G
T
Inflation
Decr G to $1.8
or
Incr T to $2.2
So, contractionary fiscal policy
leads to lower interest rates.
Deficit so
higher I.R.
Budget
Deficit
Surplus so
Lower I.R.
Wow! A
surplus
Loanable Funds Market
Start from a
PL
Balanced Budget
G & T = $2 Trillion
$2.2 tr.
$2 tr.
G
$2 tr. PL2
T
SRAS
AD2LRAS
AD1
“I can’t
get a job.”
PL1
E1
Real In. Rate
[Incr G; Decr T] [But we get negative Xn]
D2
S
D1
r=8%
r=6%
F1 F2
“Now, this is better.”
E2
YR YF
Real
$2.2 GDP
$2.2
G
AD
Y/Empl./PL;
I.R.
$1.8
$1.8
T
LFM
G
DI
C
AD
Y/Emp/PL; T
LFM
IR
PL
SRAS
Start from a
Balanced Budget
G & T = $2 Trillion
$2.2 T tril.PL1
$2
$1.8
tril.
tril..
G
LRAS
AD2
Real In. Rate
[Decr G; Incr T ] [Again, we get negative Xn]
r=6%
r=3%
$2 T tril.
PL2
T
AD1
E2
GDP
[like we have
“money trees”]
$1.8
$1.8
Y/Empl./PL;
AD
LFM
G
I.R.
$2.2
$2.2
T
F2 F1
E1
YF YI Real
G
Loanable Funds Market
D1
D2
S
DI
C
AD
Y/Emp/PL;
T
LFM
IR
Discretionary
Fiscal Policy
Deliberate use of government
spending and/or taxing.
“G” and “T”
Discretion of Congress
Nondiscretionary
Fiscal Policy
Unempl. check
Automatic Stabilizers
1.Welfare & food stamps
2. Unemploy. insurance
3. Social security
4. Corporate Dividends
5. Progressive Tax System
[Automatic stabilizers]
Suppose the economy is in
Real GDP
AD1
AS
AD2
PL
YR Y*
“Recession”
recession:
Tax
collections
Transfer
payments
G>T
The deficit grows
[Automatic stabilizers]
If the economy has an
Real GDP
PL
AS
AD2
AD1
inflationary gap:
Tax
collections
Transfer
payments
G<T
Y* YI
“Inflationary Gap”
The surplus grows
Discretionary [“Active”] Fiscal Policy [“G” & “T”]
[in a nutshell]
Contractionary Fiscal Policy
1. Decrease “G”
2. Increase “T”
AD3
AD1
AD2
AS
PL2
PL1
PL3
Peak
Peak
YR
YF
YI
Peak
Peak
Expansionary Fiscal Policy
Trough
Trough
[Takes about 1/3 to ½ out of the curves]
1. Increase “G”
2. Decrease “T”
Peak
Raise
“T”
Peak
Raise
“T”
AD3
PL2
Trough
PL1
Deficit Spending
“Balance the economy over the PL3
course of the Business Cycle”
AD1
AD2
AS
Raise
Deficit
Spending Taxes
YR
YF
YI
Bus. Cycle
“Even if the jobs are digging
holes and filling them up.”
Recess – Lower T
Deficits
Inflat – Raise T
Surpluses
FINANCING OF DEFICITS
[Is borrowing or printing the money more expansionary?]
1. Government borrows from the public
[results in higher interest rates
which crowds out investment]
Higher
I.R.
MS1 MS2
2. Just print the money
[Money creation – lower interest rates
so this would be more expansionary]
But the LR increase in MS results
in an increase
in inflation
PL2
7%
4%
Lower I.R.
AD2 AS
AD1
PL1
Y* Y
[Should we hold the surplus or give it back]
1. Debt Retirement
[Give the surplus back during recessions to get
lower interest rates and expand the economy]
2. Impound The Surplus
[Keep the surplus during inflations and give it back
during recessions]
AD2 AS
PL2
AD1
PL1
Y* YI
[Incr G
AD1 AD2
4%
2%
AS
G
IG
YR Y*
Market
D1 D2
10%
6%
s
F1 F2
Quantity of LF
DI
Decr Ig]
10%
Real interest rate
PL
Real I.R.
Loanable Funds
incr I.R.
8%
6%
4%
2%
Crowding
Out Effect
0
15
20
25
15
Investment (billions of
dollars)
5
10
In this case, it would be 100% “crowding out”.
[The higher RIR could also cause crowding-out of Xn.]
G can finance a deficit by:
Friedman
Just follow the
“monetary rule.”
1. Borrowing - this raises interest
rates in the LFM and “crowds out” investment.
2. Money Creation - no “crowding out”
so is more expansionary than borrowing.
Negative Net Export Effect of Fiscal Policy
“Negative Xn”
Expansionary Fiscal Policy
Due to higher interest rates, dollar appreciates
LRAS SRAS
AD
AD+G +C +IgAD
-Xn
YR
Y*
Negative Net Export Effect of Fiscal Policy
“Negative Xn” of
“Negative Xn” of
Expansionary Fiscal Policy
Contractionary Fiscal Policy
Due to higher interest
rates, dollar appreciates
Due to lower interest
rates, dollar depreciates
LRAS SRAS
LRAS SRAS
+G +CAD+Ig
AD
AD
-Ig -C -G
+Xn
-Xn
YR
Y*
Y* YI
Liberal (“G”) or Conservative (“G”)
G
G
Liberals
Recession: Increase “G”; Inflation: Increase “T”
Conservatives
Recession: Decrease “T”; Inflation: Decrease “G”
“The shower starts out too cold, because the pipes have
not yet warmed up. So the fool turns up the hot water.
Nothing happens, so he turns up the hot water further.
The hot water comes on and scalds him. He turns up the
cold water. Nothing happens right away, so he turns up
the cold further. When the cold finally starts to come up,
he finds the shower too cold, and so it goes.”
Fiscal Policy lags
1.
2.
3.
4.
Data (recognition) lag
“Wait-and-see” lag – short run
Legislative lag (political)
Effect lag [takes months]
Discretionary fiscal policies
intended to fight a recession
often end up feeding a boom
and vice versa.
E4
LRAS
SRAS1
AD1
AD2
SRAS2
E1
E2
E4
E3
YR YF YI
E2
All too often, policy makers can inadvertently
exacerbate rather than mitigate the magnitude
of economic fluctuations.
Traditional Fiscal Policy [“G” & “T”]
will not work with Stagflation
AD2 LRAS SRAS2
AD1
15%
10%
AD3
4%
15% 10% 5%
YR YR YF
Stagflation
Tax rate (percent)
100
l
0
Tax revenue (dollars)
Tax rate (%)
100
m
l
0
Tax revenue (dollars)
100
Tax rate (percent)
n
m
l
0
Tax revenue (dollars)
100
Tax rate (%)
n
m
m
Maximum
Tax
Revenue
l
0
Tax revenue (dollars)
Supply-Side Economics [Voodoo Economics?]
Shift the AS curve back to the right
1. Reduce corporate taxes from 50% to 35%
[they have more money and increase investment, so more jobs]
2. Accelerated depreciation of capital investment from 10 years to 3 years
[businesses save taxes enabling them to invest more]
3. Reduce personal income taxes by $250 billion [keeping more of our money
makes us work harder & longer; also, we buy more, so more jobs and in
addition, we save more, which lowers interest rates, which increases Ig]
4. Tax Credits for R&D [businesses have more money, so more Ig and more jobs]
Motto: Get the government off our [ regulations] backs & watch the AS curve shift.
Was President Reagan
a “closet Keynesian”
with all the “G” & “T”?
Perhaps he was a
“Keynesian in drag.”
PL
AD
AS2 AS1
10%
3%
10% 5%
President Reagan said he was on the Laffer curve. He said that after WWII,
when he started making big money, that he could do 4 movies before making
$200,000 and hitting the top marginal tax rate of 91%. After four, because he
could only keep 9%, he would quit making movies until the next year.
“Yes, I was on the
Laffer cuve. I couldn’t
shoot my way out”
Tax revenue (dollars)
b
0
Maximum Tax Revenue
c
a
Reagan
The “Gipper”
b
Tax rate (percent)
Bonzo
100
For rich people, this was a disincentive to keep working, so they would quit
when they hit the top marginal tax rate. For most workers, this was not the case.
Can sustain a much greater increase in AD if the
AS curve is also shifting to the right.
Price level
AD1 AD2
AS1
AS2
PL2
10% PL1
PL3
0
Q1 Q2
10%
Q3
Real GDP
Inflation and the Multiplier [4]
Full Multiplier Effect
Price Level
AD1
AD2
AS
AD3
+20
+20
Reduced
Multiplier
Effect Due
to Inflation
P2
P1
+ 80 bil.
M(4) = Y/ E
[80] [20]
GDP1
+ 40 bil.
GDP2
GDP3
M(2) =
Y/ E
[40] [20]
EXPANSIONARY FISCAL POLICY
[MPS=.25] the multiplier at work...
$5 billion initial direct increase in spending
AS
Price level
AD1
AD2
Full $20 billion
increase in AD
+5
PL
$485
$505
Real GDP (billions)
CONTRACTIONARY FISCAL POLICY
[MPS=.25] the multiplier at work...
AD2 AD1AS
Price level
PL1
PL2
$5 billion initial
direct decrease in
spending
Full $20 billion
decrease in AD
$515
Real GDP (billions)
More vertical [more progressive],
the more stability for the economy.
50%
Government Expenditures,
G, and Tax Revenues, T
12-31-65
Taxes
35%Taxes
Transfers
More
Transfers
Deficit
Less Tax
Money
More tax
money
Surplus
Fewer
Fewer
Transfers
Transfers
10%
5%
GDP1
GDP2
GDP3
YR
YI
Y*
Real Domestic Output, GDP
Gov.
purchases
Nondiscretionary [“Passive”] Fiscal Policy (Automatic stabilizers)
1. Transfer Payments
D. Corporate dividends
AD2 AS
A. Welfare checks
B. Food Stamps
C. Unemployment checks
2. Progressive Income Taxes
E. Social Security
F. Veteran’s benefits
Automatic stabilizers
take 33-50% out.
33%-50%
Stabilizers are like a thermostat
maintaining temperature.
They are shock absorbers.
Taxes reduce the drop in DI
during recessions and reduces
the jump in DI during expansions.
AD1
AD3
YR
Y*
YR ; T
; AD2
YI ; T
; AD3
YI
The automatic stabilizers may be called the automatic pilot of our economy,
not very well suited for takeoffs and landings, but fine for the smooth part of the
the flight. But when the going gets rough, the economy must use manual controls.
[discretionary G&T]
A pilot may take a stroll thru and let the co-pilot
cruise. If there is turbulence, the pilot will rush
to the cockpit [President & Congress] and use manual
controls to correct turbulence. Discretionary
fiscal policy is our manual control system.
$20 Billion Government Spending & Impact on Equilibrium Y
$20 bil. on National Defense $550
C + Ig + Xn + G
Government
Spending of
$20 Billion
C + Ig + Xn
Consumption
$470
Mixed - Open
$390
AE (billions)
Private-public - ROW
Increases Y by $80
[$20 x 4 = $80]
o
45 o
390
470
550
RGDP
Incr. T by $20 billion [MT = 3] Equilibrium GDP[-60]
C + Ig + Xn + G
Ca + Ig + Xn + G
$20 bil. incr in T $550
$490
Mixed-Open
-20 x 3 = -$60
o
45
o
$490
$550
RGDP
Real domestic product, GDP (billions of dollars)
Balanced Budget Multiplier [$20 billion]
[“T” affects AD indirectly thru “C”; “G” affects AD directly]
Net Change in GDP =
The increase in “T” means we
would have consumed $15 and
kept $5 in our pockets.
Sa= -$5
T
$20
Ca= -$15
The increase in “G”
flows directly into
the economy.
+$20
GDP=
-$60
GDP
=$80
MT = MPC/MPS=.75/.25=3
AS
So, 3 x -$20 = -$60
AD1 AD2
PL
$470 billion
$490
billion
G
$20
ME = 1/MPS
ME = 1/.25 = 4
So, 4 x $20 = $80
1. With the Employment Act of 1946, the federal government committed
itself to accept (total/some) degree of responsibility for employment/prices.
2. Fiscal policy is carried out primarily by the (local/state/federal) government.
3. Discretionary fiscal policy [G & T] (does/does not) require congressional action.
4. In a mixed [private & public) closed economy, taxes & (savings/government spending)
are leakages, while Ig and (savings/government spending) are injections.
5. In a mixed economy, the equilibrium GDP exists where (C+Ig/C+Ig+G+Xn)=GDP.
6. The balanced budget multiplier indicates that equal increases in G&T tend to
(decrease/increase/not change) the equilibrium GDP. [MBB is “1”]
7. Assume in a private economy that equilibrium GDP is $400 billion & the MPC is
.80. Suppose the G collects new taxes of $50 bil. & spends the entire amount on
our infrastructure. As a result equilibrium GDP will be ($400/$450/$500) billion.
8. Suppose a constitutional amendment requires that the G always balance
its budget. If it desired to increase GDP by $40 billion, G should
(increase/decrease) government spending & taxes by ($30/$40/$50) billion.
9. In a severe recession, Keynesians
would favor a(n) (increase/decrease) in
taxes.
PL
AE2
AE1
YR
Y*
800
?
10. If the government tries to eliminate a budget deficit during a depression,
these efforts will (help/hurt) the depression.
11. A conservative economist who advocates an active fiscal policy
would recommend tax (increases/decreases) during a recession and
(increases/decreases) in government spending during inflation.
PL
AE
I A
C YR
12. If the F.E. GDP is OC, then it would be appropriate fiscal policy for
O
government to (increase/decrease) “G” and (increase/decrease) “T”.
13. If the F.E. GDP is OA, then it would be appropriate fiscal policy for
government to (increase/decrease) “G” and (increase/decrease) “T”.
14. If G increases its spending during a recession to assist
the economy, the funds must come from some source.
(Additional taxes/Borrowing from the public/Creating new money)
would tend to be the most expansionary.
15. The following fiscal actions, (incurring a budget surplus
and allowing it to accumulate as idle Treasury balances/
incurring a budget surplus which is used to retire debt held
by the public) is likely to be most effective in curbing inflation.
16. The greatest anti-inflationary impact of a budget
surplus will occur when the G (impounds/uses) the surplus
funds & lets them (stand idle/pay off the debt). Should I give
it back?
17. In describing the built-in stabilizers, we can say that
personal & corporate income tax collections
automatically (incr/decr) as GDP increases & transfers
and subsidies (incr/decr) as GDP increases.
Recognition Lag
Action Lag
Effect Lag
FISCAL POLICY – Pure and Simple
There are 3 things that could “diminish AD.”
Price level
AD1
AD2 AS
Fiscal Policy:
No Complications
PL
$490
YR
$510 Real GDP (billions)
Y*
Three things that could “diminish AD.”
1. Crowding-out Effect
2. Net Export Effect
3. Inflation
AD1 AD’2 AD2 AS
Net Export Effect
Expansionary fiscal policy
leads to more government
borrowing, increasing the
interest rate, appreciating
the dollar, & decreasing Xn.
PL
Crowding-out Effect
Increasing G results
in higher interest rates,
decreasing investment
and the . . .
$490 $503 $510
Real GDP (billions)
3. Inflation would be a third factor
that could reduce aggregate demand
AD2
Price level
AD1
AS
P1
$495 $505 $515
Real GDP (billions)
T2
1
10%
5%
Answer the next 3 questions(18-21) based on the diagram.
18. Deficits will be realized at GDP levels (below/above) C, and
surpluses (below/above) C.
19. If the F.E. GDP for the economy is at D, the F.E. budget will
entail a (deficit/surplus).
20. If the tax line had a greater slope [more progressive tax system],
stability would be (less/greater).
21. If government adhered strictly to an annually balanced budget
then the government’s budget would tend to
the economy.
(destabilize/stabilize)
Tax Revenue
25% [T2]
20%
Flat 20% Tax
Y*
YR
For Questions 22-24 [graph]
20% [T1]
YI
GDP
22. (T1/T4) tax system is characterized by the least built-in stability.
23. (T1/T4) tax system is characterized by the most built-in stability.
24. (T1/T4) tax system will generate the largest cyclical deficits.
25. Nondiscretionary Fiscal Policy (does/does not)
require congressional action.
26. If the MPC is .5, a $10 B increase in “G” will increase “C”
[not income] by ($20/$10/$5) billion.
[G increase in spending of $10 B increases income(Y) by $20 B.
With MPC of .5, C increases $10 B]
27. If government tries to give back a surplus during an
inflationary FE year, this will be (pro-cyclical/counter-cyclical).
28. When politicians use fiscal policy to cause an improvement
in the economy just prior to an election, this is a
(presidential/Congressional/political) business cycle.
29. When G incurs a deficit which is financed by borrowing,
causing interest rates to increase which decreases Ig, this
is called the (crowding-in/crowding out) effect.
30. Supply-siders argue that the primary effect of tax cuts is
to shift the AS curve (leftward/rightward).
31. If the MPC is .8, a $2 billion increase in “G” will increase
“consumption” by ($10/$8/$6) billion.
[When G increases by $2 billion, Y does increase by $10, but *8 (80%) is consumed, or $8 billion]
32. If the MPC is .9, a $1 billion increase in “G” will increase
“consumption” by ($10/$9/$8) billion.
AE
33. In a private-closed economy, the MPS is .2,
consumption equals income at $200
billion, & the level of investment is $10
billion. The level of income at the new
“C”
200
45°
200
equilibrium level is ($200/$250) billion.
34. If the MPS is .2 and the economy has a
recessionary spending gap of $5 bil.,
we may conclude that the equilibrium level
of GDP is ($5/$20/$25) below the FE GDP.
S
C+Ig
?
AE
S
AE2
AE1
45°
YR
?
35. If the MPS is .5 and the economy has an
S
AE1
AE2
AE
inflationary spending gap of $6 billion,
we may conclude that the equilibrium level
of GDP is ($6/$12/$18) billion beyond the
FE GDP.
45°
Y*
YI
36. If the government decreases G&T by $10 billion, then a
MPS of .10, the equilibrium GDP would (increase/decrease) by
($5/$10/$100) billion.
37. With a MPC of .75, government increases G&T by $8 billion.
The equilibrium GDP (increases/decreases) by ($75/$32/$8) billion.
38. If the government runs a budget surplus and desires to
curb inflation, it should (give the surplus back/keep it in storage).
1. Expansionary fiscal policy will be most effective
[increase GDP] when the AS curve is (vertical/horizontal)
& (incr/decr) “C” and (incr/decr) unemployment.
2. The paradox of thrift indicates that an increase in saving
(matched/unmatched) by an increase in investment will
lower equilibrium GDP.
[On #3, start from
a balanced budget]
G $2 Trillion
T $2 Trillion
3. A contractionary fiscal policy [decr G, incr T] would cause a[an]
(incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates.
[G
; LFM
; In. Rates ] [T
; LFM
; In. Rates ]
An expansionary fiscal policy [incr G, decr T] would cause a[an]
(incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates.
[G
; LFM
; In. Rates ] [T
; LFM
; In. Rates ]
4. In the AE model, if AE[AD]doesn’t buy up FE output(GDP), then the
equilibrium output is (less than/more then) full employment output.
“Recessionary Gap”
“Inflationary Gap”
5. To decrease AD the greatest amount, the government should:
(decrease “G” only/increase “T” only/both decr G & incr T)
6. To increase AD the greatest amount, the “G” should:
(increase “G” only/decrease “T” only/both incr G and decr T)
7. In a recessionary gap (AE model) at the equilibrium point[actual GDP]
planned investment is (greater than/equal to/less than) saving, but at the FE
GDP level, planned investment[backup] is (greater than/equal to/less than) saving.
8. In an inflationary gap (AE model), at the equilibrium point [actual GDP]
planned investment [backup] is (greater than/equal to/less than) saving, but at
the FE level, planned investment is (greater than/equal to/less than) saving.
9. If businesses are experiencing an unplanned increase in inventories, AE is
(less than/greater than) FE output & spending will (increase/decrease).
10.
If businesses are experiencing an unplanned decrease in inventories [disinvestment]
AE is (less than/greater than) FE output & spending will (increase/decrease).
500
500
11. If “C” equals income at $500 billion, & MPC is .9, then an
increase in Ig of $10 billion will change equilibrium GDP to
($400/$490/$510/$600) billion.
12. A conservative economist would want tax (incr/decr) during
a recession & (incr/decr) in “G” during inflationary times.
13. A liberal economist would want tax (incr/decr) during an
inflation & (incr/decr) in “G” during recessionary periods.
14. An inflationary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP.
15. A recessionary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP.
16. To increase GDP [but reduce military spending], we would combine two
(domestic/overseas) bases into one (domestic/overseas) base.
17. A tax cut to expand the economy would (incr/decr) Y & (incr/decr) in. rates.
18. A tax increase to contract the economy would (incr/decr) Y & (incr/decr) IR.
19. To increase equilibrium GDP by $400,000,
with a MPC of .5, a Keynesian economist
would (decrease “T”/increase “G”) by $200,000.
20. Equilibrium GDP is $500 billion and MPS is .4.
Now “G” collects taxes of $22 billion and spends
the entire amount. As a result, equilibrium GDP will
change to: ($445/$478/$522/$555).
21. With a MPC of .5, a $12 billion increase
in “G” will increase “C” by ($12/$24/$36) bil.
22. With a MPC of .5 and the economy in a
recessionary spending gap of $12 billion,
we may conclude that the equilibrium is
($12/$24/$36) billion short of FE GDP.
23. An increase in Ig of $25 billion results in an increase
in equilibrium income (GDP) of $50B, so the MPS is? .5
24. A contractionary fiscal policy results in a(n) (incr/decr)
in output, and a(n) (incr/decr) in interest rates. [Incr T or Decr G]
25. Increasing T or decreasing G will (increase/decrease)
consumption, and (increase/decrease) unemployment.
26. With a MPC of .5, and the economy with an inflationary GDP
Gap of $50B, G could eliminate this inflationary GDP Gap by
reducing government spending by? $25 billion
27. With a MPC of .5 and current output at $500 billion but FE
output is $700 billion, correct fiscal policy would be to
(increase G/decrease T) by $100 billion.
28. An increase in Ig in an economy
(increase)/decrease) GDP & (increase/decrease) C.
29. In a recessionary economy, at
FE GDP, saving is (less than/more than) Ig.
30. In a recessionary economy,
(actual Y/potential Y) exceeds (actual Y/potential Y).
31. In a mixed-closed economy (no Xn), the leakages are?
[S & T] and the injections are? [G & Ig]
32. If the economy has an inflationary Gap, at
FE GDP, saving (exceeds/is less than) Ig.
33. If there is an equal increase in G&T of $25 billion,
then output will
(increase/decrease) &
interest rates
[based on PL] will
(increase/decrease).
E-con
E-con
The End