Exam 20: Fiscal Policy and Monetary Policy

Price level (GDP deflator, = ) Aggregate supply (billions of dollars) Aggregate demand (billions of 2005 dollars) 30 28 16 25 25 19 20 22 22 15 19 25 10 16 28 -Using the data in the above table, if potential GDP for this economy is $25 billion, then in order to restore full employment, the federal funds rate can be

The use of discretionary fiscal policy is hampered by i. difficulty of estimating the level of potential GDP. Ii. lack of accuracy of economic forecasts. Iii. the small impact tax cuts and increases in government expenditure have on aggregate demand.

20.3 Chapter Figures The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP. -In the figure above, the ________ gap is one trillion dollars. To close the gap, the government can change expenditure by ________ one trillion dollars.

Needs-tested spending

When the Fed ________ the federal funds rate, the opportunity cost of firms' investment ________ and so the quantity of investment ________.

-The above table gives the government outlays and tax revenues from 2008 through 2012 for two countries. In 2010 country A had a ________ and country B had a ________.

"The federal budget is required by law to balance." Is the previous statement correct or incorrect?

An example of a fiscal stimulus is

During a recession, unemployment compensation payments increase without the need for any government action. This increase is an example of

20.3 Chapter Figures The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP. -In the figure above, the ________ gap is one trillion dollars. To close the gap, the government can ________ government expenditure and/or ________ taxes.

If a tax cut increases people's labor supply, then

Explain the role the Fed, Congress, and the President play in making monetary policy.

-Does the figure above illustrate a recessionary or an inflationary gap? What do potential GDP and real GDP equal? What is an appropriate fiscal policy to restore real GDP to potential real GDP?

When the economy is in a recession, the Fed can ________ the federal funds rate, which ________ aggregate demand and ________ real GDP.

If real GDP exceeds potential GDP, to move the economy to potential GDP the Fed

A change in monetary policy affects

Needs-tested spending is defined as

Ignoring any supply-side effects, if government expenditure on goods and services decrease by $10 billion and taxes decrease by $10 billion, then real GDP ________ and the price level ________.

In a recession, the Fed's monetary policy aims to ________ the real interest rate, ________ aggregate demand, and ________ aggregate supply.

Explain the difference between discretionary and automatic fiscal policy. Provide examples of each.