Exam 18: Fiscal Policy

Automatic stabilizers refer to

In preparing their estimates of the stimulus package's effect on GDP,Obama administration economists estimated a government purchases multiplier of 1.57.This indicates that a $1 billion increase in government purchases would increase equilibrium real GDP by

Expansionary fiscal policy involves

Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion.If the president and Congress increased government purchases by $500 billion,what would be the result on the economy?

In preparing their estimates of the stimulus package's effect on GDP,Obama administration economists estimated a government purchases multiplier of 1.57.Economist Robert Barro argues that during wartime,the military expenditures multiplier would be ________ the administration's estimate of the government purchases multiplier,and economists Lawrence Christiano,Martin Eichenbaum,and Sergio Rebelo argued that when short-term interest rates are zero,the government purchases multiplier would be ________ the administration's estimate.

Figure 18-1 -Refer to Figure 18-1.Suppose the economy is in a recession and expansionary fiscal policy is pursued.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

Table 18-6 Year Potential Real GDP Real GDP Price Level 1 \ 11.0 trillion \ 11.0 trillion 100 2 11.5 trillion 11.7 trillion 109 -Refer to Table 18-6.Suppose the economy is in the state described by the table above.What problem will occur in the economy if no policy is pursued? What fiscal policy tools could be used to combat the problem? Draw a dynamic aggregate demand and aggregate supply diagram to illustrate the appropriate fiscal policy to use in this situation.

An increase in government spending lowers interest rates and increases the rate of investment in new capital.

In the case of an upward-sloping aggregate supply curve,the change in real GDP brought about by a change in government spending will be less than that predicted by the simple government purchases multiplier.

An appropriate fiscal policy response when aggregate demand is growing at a faster rate than aggregate supply is to decrease the money supply.

Double taxation refers to

Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect.

If government spending and the price level increase,then

Compared to the averages for post World War II recessions,the recession of 2007-2009 was ________ in duration and the decline in real GDP was ________.

Expansionary fiscal policy involves increasing government purchases or increasing taxes.

The Social Security and Medicare programs have been a failure in terms of reducing poverty among elderly U.S.citizens.

Before the Great Depression of the 1930s,the majority of government spending took place at the ________ and after the Great Depression the majority of government spending took place at the ________.

The problem causing most recessions is too little

Crowding out refers to a decrease in government purchases as a result of an increase in private expenditures.

Assume a country is required by law to balance the budget every year.Suppose aggregate demand falls,causing a recession and a budget deficit.To balance the budget,what would the government need to do with the level of government spending and taxes? How would these changes in government spending and taxes affect aggregate demand and the economy?