Exam 3 Flashcards
If the government were to increase its spending, it would expect:
Aggregate demand to shift to the right
If the government undertakes expansionary fiscal policy, it:
Must want to encourage economic activity
If the government were to increase taxes, it would be enacting:
Contractionary fiscal policy
Assuming the economy is represented by the graph shown, if the government were to enact an expansionary
Fiscal policy, it would be most likely to move from:
A to B
One reason the government enacts fiscal policy instead of waiting for the economy to correct itself is:
The automatic adjustment can take a very long time
The process of deciding on and passing fiscal policy legislation creates:
A formulation lag
When an economy is in recession, discretionary fiscal policy would call for_____________ and the automatic stabilizers would______________
Lowering tax rates; lower tax revenues
When the U.S. Economy hits a recession, fiscal policy:
Automatically becomes expansionary because average tax rates go down and spending on welfare programs goes up
The idea that if governments cut taxes but not spending, people will not change their behavior, and expansionary policy will have little expansionary effect is known as:
Ricardian equivalence
I the marginal propensity to consumer is .8 the government spending multiplier must be:
5
If the MPC were to increase from .75 to .8 then the government spending multiplier would:
Increase from 4 to 5
If the government wishes to increase GDP by $1,200b and the MPC is .75 it should:
Increase its spending by $300b
If the MPC = .75 then the taxation multiplier must be:
-3
A budget deficit is:
The amount of money a government spends beyond the net revenue it brings in
A financial market is where people trade:
Futur claims on funds or goods
A bank acts as _____________ between buyers and sellers
An intermediary
The demand for low able funds comes from:
Investments
The interest rate:
All of these are true
If Howard takes out $400 loan for one year at 5 percent interest annually, he will pay back a total of:
$420
When current economic conditions are bad, people are _________ inclined to save, and when they predict bad future economic conditions they are__________ inclined to save now
Less; more
The reduction in private borrowing that is caused by an increase in government borrowing is called:
Crowding out effect
A default happens when:
A borrower fails to pay back a loan according to the agreed- upon terms
The risk- free rate is:
The interest rate at which one would lend if there were no risk of default
Intermediation is the process of:
Bringing together buyers and sellers in a market
If an asset is considered liquid, then it:
Can be sold quickly for cash without much loss of value
Diversification is:
The process by which risks are shared among many different assets or people
A dividend is:
A payment made periodically to all shareholders of a company
Speculators in the financial market:
Buy and sell assets for financial gain
In general, financial assets that have a _______ amount of risk have a __________ rate of return
Higher; higher
Government decisions about the level of taxation and public spending are called:
Fiscal Policy
