Exam 15: Financial Crises, Stabilization, and Deficits

What did Milton Friedman mean by his criticism of stabilization policy when be compared it to a "fool in the shower?"

What is the Standard and Poor's 500?

Explain how an increase in government spending might actually result in a decline in the budget deficit.

Under what circumstances might the income multiplier be zero? More specifically, there were those who argued that the income multiplier was zero during the passage of the Gramm-Rudman-Hollings Deficit Reduction Act. What was their argument?

Related to the Economics in Practice on p. 293 [605]: When is the only condition under which a stock bubble will pop?

Illustrate examples of the counter cyclical effects of the automatic stabilizers.

Explain why is the response lag for monetary policy likely longer than the response lag for fiscal policy?

When stock prices rise, what generally happens to the level of household wealth and consumption?

Explain what the deficit response index measures. Briefly explain why it is not equal to zero.

What are automatic destabilizers?

How is the Fed likely to respond during periods of excessive expansionary growth that is characterized by strong inflationary pressures? Make sure to include in your answer the change in the money supply and interest rates.

Explain what was supposed to happen under the Gramm-Rudman-Hollings Act when a congressionally enacted budget deficit was larger than the targeted amount.

Discuss what happens to the government budget deficit when government spending is reduced?

Why would a balanced budget amendment to the Constitution be considered destabilizing during an inflationary boom in which the government is running a budget surplus?

What were the political and social costs of the bailout of the U.S. financial industry?

-Using the graph above, if policy makers decide on a policy at point t3 but it does not affect the economy until period t6, then how might this be a problem?

What is meant by the use of the phrase "financial crisis" and how is it used?

Explain what the Gramm Rudman Hollings Act was meant to do.

Explain how a tax cut might actually result in a decline in the budget deficit.

Explain automatic stabilizers and their impact on the economy.