Economic Adjustment And Fiscal Policy

Question 0

What is the LRAS set by?

Answer 0

Available Land / Labor / Capital
Available Technology
Available Efficiency and Productivity

Question 1

What is the long run aggregate supply curve?

Answer 1

The maximum output possible at a given time

Fixed level of GDP

Question 2

What does not change the LRAS but changes the SRAS

Answer 2

Changes in input costs

Question 3

What occurs when there is a recession or weak economy?

The AD/AS equilibrium point is below potential

Answer 3

Recessionary Gap

Question 4

What occurs with an overheated economy?

The AD/AS equilibrium point is beyond potential

Answer 4

Inflationary gap

Question 5

What will happen with the R Gap and I Gap over time?

Answer 5

Will fix itself

Question 6

What is the key factor for the R Gap and the I Gap

Answer 6

Input prices

Question 7

How are input prices affiliated with the R Gap

Answer 7

Recession will reduce input prices

Businesses respond by “hiring” cheaper inputs

SRAS will shift outward - increasing GDP and decreasing PL

Question 8

How are input prices affiliated with the I Gap

Answer 8

Tight resource markets (L,L,C) will increase input prices

Businesses will employ fewer resources

SRAS will shift inward - VERY PAINFUL ADJUSTMENT!

Question 9

What is the idea of classical economics? What is it based on?

Answer 9

The economy will fix itself

Based on supply driven economy - supply creates income needed to buy output

Question 10

Describe the classical economic idea concerning interest rates

Answer 10

People increase savings during recession

This decreases real rate of interest meaning that businesses will increase investment

Question 11

Describe the flexible wages/prices classical economic idea

Answer 11

Input prices decrease during recession

Businesses love cheap inputs and will increase supply

Question 12

What does classical economics believe the gov should do?

Answer 12

Get out da way!

Question 13

What is the thought of Keynesian economics? What is the central aspect?

Answer 13

Economy will not self adjust

Demand

Question 14

What is the Keynesian idea regarding interest rates

Answer 14

They decrease during a recession, but why would a business borrow for capital during a recession????

Question 15

What is the Keynesian idea when it comes to inflexible wages and prices

Answer 15

People resist lowered wages and so businesses will not increase hiring

“Sticky wages”

Question 16

What does Keynesian economics believe the gov should do?

Answer 16

Stimulate agg demand through

Decreases taxes
Increased transfer payments
Increased gov spending

Question 17

What does Keynesian fiscal policy do?

Answer 17

Adjusts either taxes, gov spending, or trans payments to influence aggregate demand

Question 18

What is the goal of expansionary fiscal policy

Answer 18

To fix the R Gap by increasing agg demand

Question 19

What is the goal of contractionary fiscal policy

Answer 19

Fix the I gap by decreasing agg demand

Question 20

How do you solve an R Gap or I Gap problem

Answer 20

Identify the gap amount
Determine the multiplier from the MPC ; Determine the tax multiplier
Divide the gap amount by the regular multiplier- amount of change in gov spending
Then divide gap amount by tax multiplier- amount change in tax or trans payments

Question 21

What happens to the fiscal policy as the MPC goes down

Answer 21

Fiscal policy increases

Question 22

What must the gov do when using expansionary fiscal policy

Answer 22

Borrow money which means running a budget deficit

Question 23

From where does the gov borrow the money from

Answer 23

Factor market - form of bonds

Question 24

Amount of money the gov spends

Answer 24

Outlay

Question 25

When revenues are greater than outlays

Answer 25

Budget surplus

Question 26

What is reagonomics other known as

Answer 26

Supply side economics

Question 27

What are the main goals of reagonomics

Answer 27

Target tax cuts toward supply side of economy

Increase labor hours of workers

Increase amount of capital investment to increase LRAS

Question 28

What taxes are cut for reagonomics

Answer 28

Personal income tax

Tax on savings account

Corporate income tax

Capital gains tax

Question 29

What is the thought process or reagonomics for cutting personal income tax

Answer 29

To increase a worker’s desire to work

Question 30

What is the thought process of reagonomics for cutting tax on savings account

Answer 30

To increase saving rate therefore increasing capital borrowing

Question 31

What is the thought process

Of reagonomics for cutting corporate income tax

Answer 31

More spending on capital gains

Question 32

What is the thought process of reagonomics for cutting capital gains tax

Answer 32

Increase desire to own stocks and invest in the market

Question 33

What is the purpose of reagonomics for cutting the taxes

Answer 33

Trying to shift supply curve outward

Question 34

What group of people does reagonomics seem to benefit

Answer 34

Rich people

Question 35

What were the actual effects of reagonomics

Answer 35

Small effects of tax cuts
Effects stronger on demand side
More uneven distribution of income
HUGE budget deficits

Question 36

What was the impact of reagonomics

Answer 36

Same as Keynesian policy

Question 37

What does contractionary fiscal policy cause when the budget is balanced?

Answer 37

A budget surplus

Question 38

Multiplier when MPC = .9

Answer 38

10

Question 39

Multiplier when MPC = .8

Answer 39

5

Question 40

Multiplier when MPC = .7

Answer 40

4

Question 41

Multiplier when MPC = .66

Answer 41

3.33

Question 42

Multiplier when MPC = .6

Answer 42

2.5

Question 43

Multiplier when MPC = .5

Answer 43

2