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When the federal government uses taxation and spending actions to stimulate the economy it is conducting :

Fiscal Policy

Fiscal policy refers to the

Manipulation of government spending and taxes to stabilize domestic output, employment and price level

The council of economic advisers gives economic advice to the:


If the congress passes legislation to increase government spending to counter the effects of the recession, then this would be an example of a(n):

Expansionary fiscal policy

The combination of fiscal policies that would reinforce each other and be most expansionary would be a(n):

Increase in government spending and a decrease in taxes

Which combination of fiscal policy actions would be most likely be offsetting

Increase taxes and government spending

Which set of fiscal policies would tend to offset each other?

A decrease in government spending and taxes

In an aggregate demand and aggregate supply graph, a contractionary fiscal policy can be illustrated by a :

Leftward shift in the aggregate demand curve

Automatic stabilizers smooth fluctuations in the economy because they produce changes in government's deficit that

Help offset changes in GDP

If the economy is to have automatic stabilizers, when real GDP rises:

Tax revenues should rise

The standardized budget is also called the:

Full-employment budget

If the standardized budget shows a deficit of about 100 billion$$ and the actual budget shows a deficit of about 150$ billion, it can be concluded that there is:

A cyclical deficit

Surpluses from social sercurity

Reduce the size of the actual budget deficit

A major reason that a public debt cannot bankrupt the federal government is because:

the public debt can be easily refinanced

Which is an important consequence of the public debt of the United States

It leads to fewer incentives to bear risk and innovate

The crowding- out effect from government borrowing to finance the public debt is reduced when

Public investment complements private investment

Increased government spending for investments such as highways or harbors financed by increasing the public debt would most likely

Increase the amount of public capital stock in the future.

Fiscal policy is enacted through changes in

Taxation and government spending

An expansionary fiscal policy can be illustrated by an

Increase in aggregate demand

Which set of fiscal policies would tend to offset each other

A decrease in government spending and taxes

Another term for full employment budget is the

Standardized budget

The standardized deficit is the difference between annual government expenditures and tax revenues that would be occurred if the economy was:

At full employment

Assume that the economy is in a recession and there is a budget deficit. A strict balanced budget amendment that would require the federal government to balance during a recession would be

Contractionary and worsen the effects of the recession

A federal budget deficit exists when

Federal government spending exceeds tax revenues

The public debt is the

Accumulation of federal budget surpluses and deficits over time

How is the public debt calculated?

Computing the difference between annual government tax revenue and annual government spending and cumulating the differences over the years of the nation

In 2007 the public debt was about

9.01$ trillion

About what percentage of the public debt is held by US government agencies and the federal reserve?


A major reason that a public debt cannot bankrupt the federal government is beacuse

The public debt can be easily refinanced

One of the potential problems with the public debt is that it may:

Lead to added taxes that reduce economic incentives

Which would tend to reduce to crowding-out effect that occurs when the federal government increases its borrowing to finance a deficit:

The economy is operating at less than full employment

Crowding out is a decrease in private investment caused by

An expansionary fiscal policy

Aggregate Demand

The total of all spending in the economy

Aggregate supply - short run

the total of all production in the economy when WAGES and COSTS are UNCHANGED

Aggregate demand curve

A curve showing real GDP as the sum of all spending at various price levels, all other things helf constant

Aggregate demand


Aggregate supply

curves is a schedule that shows the total quantity of goods and services supplied at different price levels. The aggregate supply curve in the short run and in the long run vary by the degree of wage adjustment

What shape does the Short run aggregate supply curve have?


Why does the short run aggregate supply curve have that shape?

The SRAS is upsloping because in the short run prices may increase by wages DONT . and profit margins rise, and production rises, Rising prices and rising production results in an upsloping SRAS curve.

What shifts the short run aggregate supply?

Changes in cost of production, regulations, technology, productivity, marginal tax rates, external shocks (oil embargo, natural disasters, epidemics)

Short run Equilibrium

The economy is ALWAYS producing some level of GDP. This level of GDP is the short run equilibrium. If it is full employment no policy is needed

The economy is ALWAYS producing some level of :


The long run aggregate supply curve

In the long run wages have had a chance to change. Peop,e have full information and wages have adjusted to any price changes

What is the long run aggregate supply curve shape?

Vertical because wages have had a chance to change with price change

Demand Pull inflation

occurs when aggregate demand increases (aggregrate demand curve shifts to the right)

Cost push inflation

occurs when the costs of production rise (aggregate supply curve shifts to the right)


occurs when aggregate demand falls (aggregate demand curve shifts to the left and prices are sticky downwards)

Discretionary fiscal policy

consists of deliberate changes in government spending and tax collections desgined to achieve full employment control inflation and encourage economic growth

Nondiscretionary fiscal policy

includes changes in taxes and government spendingn that occur automatically independent of congressional action

Discretionary spending

what the president and the congress DECIDE to spend through annual appropriations bills. examples include money for such activities as the coast guard, FBI, foreign aid

Mandatory spending

provided by permanent law rather than annual appropriations . An example is social security. The president and the congress can change the law to revise the eligibility criteria or the payment formula and thus change the level of spending on mandatory programs, but they dont have to take annual action to ensure the continuation of spending

Balanced budget

A balanced budget occurs when total receipts equal total outlays (spending ) for a fiscal year

Off budget

by law, social security and the postal service are accounted for separetly from all other programs

On budget

those programs not legally designated as off budget


the amount by which outlays exceed receipts in a fiscal year. may be "off budget", "on budget" or unified budget deficit

Discretionary fiscal policy

the discretioary changes in government expenditures and/or taxes in order to achieve certain national economic goals

Non discretionary fiscal policy

changes in expenditures and/or taxes that AUTOMATICALLY occur when GDP changes. Without deliberate action of congress. called "AUTOMATIC STABILIZERS"

Expansionary fiscal policy

is an increase in government spending, a decrease in taxes or some combination of the two for the purpose of increasing aggregate demand and real output

Contractionary fiscal policy

is a decrease in government spending and increase in taxes or come combination of the two for the purpose of decreasing aggregate demand and halting inflation

Built in stabilizers

is anything that increases the government budget deficit during a recession and increases its budget surplus during an expansion without requiring explicit action by policy makers

The standardized budget

is a measure of what the federal budget deficit surplus would be with existing tax rates and government spending programs if the economy had achieved its full employment GDP in the year

Cyclical deficit

is a federal deficit that is caused by a recession and the consequent decline in tax revenue

Recognition time lag

the time required to gather information about the current state of the economy

Action time lag

the time required between recognizing an economic problem and putting policy into effect. Particularly long for fiscal policy

Effect time lag

the time it takes for fiscal policy to affect the economy

Public debt

the total value of all accumlated deficits

us government securities

treasury bills, notes, bonds, and I bonds issued by the federal government to finance expenditures that exceed tax revenues

The 3 "effects"

1. real balance effect - as price level falls, consumers real balances are worth more and they spend more
2. interest rate effect- price levels fall, interest rates also fall, this increases business spending
3. foreign trade effect- as price levels fall, us goods are more attractive to foreign buyers and so net exports will increase

how does the aggregate demand curve slope?


SRAS curve is slopping ? why?

upsloping because as price increase wages do NOT. profit margin will increase and production will also increase

what shifts SRAS?

changes in production, natural disasters, changes in productivity, changes in taxes

LRAS curve is?


LRAS CAN move but not from any policy strategy. true/false


why is the LRAS verticle ?

because when prices increase wages also increase, profit margins stay the same and real gdp stays the same

short run equilibrium is where we ?


long run equilibrium is where ?

we want to be

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