Unit 5 Long-Run Consequences of Stabilization Policies

Question 1

5.1 v1: Why are policies implemented? How do recessionary and inflationary gaps close

Answer 1

To close output gaps.
If a recessionary gap exists, lower unemployment
If an inflationary gap exists, lower inflation

Question 2

5.1 v1: How are policies implemented?

Answer 2

The Fiscal policy is implemented by manipulating AD by changing spending and taxes.
the monetary policy is implemented by manipulating AD by changing interest rates.

Question 3

5.1 v1: What are the expansionary and contractionary fiscal and monetary policy used for?

Answer 3

A combination of expansionary or contractionary fiscal and monetary policies may be used to restore full employment when a economy is in a inflationary or recessionary output gap.

Question 4

5.1 v1: What are the fiscal and monetary policies used for?

Answer 4

A combinations of fiscal and monetary policy are used to influence AD, real output, the price level, and interest rates. The way these factors change may not always be consistent.

Question 5

5.1 v1: What do expansionary and contractionary fiscal and monetary policies increase or decrease

Answer 5

Expansionary Fiscal policy increase AD, real output, the price level, and interest rates. vice versa for contractionary.
Expansionary monetary policy increases AD, real output, the price level, and decreases interest rates. vice versa for contractionary.

Question 6

5.2 v1: What is the short-run Phillips curve?

Answer 6

A curve that shows the inverse relationship between unemployment and inflation

Question 7

5.2 v1: How does the rate of unemployment and inflation change on phillips curve?

Answer 7

The point on the curve representing the rate of unemployment and inflation moves up or down as AD/GDP changes.

Question 8

5.2 v1: Why is the relationship between unemployment and inflation inverse?

Answer 8

When inflation is high materials and wages are less expensive meaning producers can hire more workers and expand production. When inflation is low dollars have more value so producers and consumers will want to hold that value increasing unemployment.

Question 9

5.2 v1: What is the long-run Phillips curve?

Answer 9

The long-run Phillips curve shows the natural rate of unemployment also referred to as Full employment.

Question 10

5.2 v1: What is equilibrium in the Phillips curve and what does it mean?

Answer 10

Where LRPC and SRPC meet. In equilibrium, the inflationary rate is at LRPC which represents the ideal inflationary rate when the economy is at Full employment.

Question 11

5.2 v1: What is a recessionary gap in the phillips curve?

Answer 11

When the rate of unemployment and inflation is to the right of the LRPC, there is a recessionary gap.
A recessionary gap means the unemployment rate goes up, inflation is going down, GDP is down, and AD has shifted to the right.

Question 12

5.2 v1: What is a inflationary gap in the phillips curve?

Answer 12

When the rate of unemployment and inflation is to the left of the LRPC, there is a inflationary gap.
A inflationary gap means the unemployment rate goes down, inflation is going up, GDP is up, and AD has shifted to the left.

Question 13

5.2 v1: When is the economy operating on phillips curve.

Answer 13

The economy is always operating on the short-run phillips curve at some point.

Question 14

5.2 v2: What happens to the SR and LR phillips curve when demand shocks occur in the AD/AS model occur?

Answer 14

The point on the SR and LR phillips curve representing the rate of unemployment and inflation will slide in the opposite direction of the demand shock. A shift of AD to right will slide the point to the left.

Question 15

5.2 v2: What happens to the SR and LR phillips curve when supply shocks occur in the AD/AS model occur?

Answer 15

The SRPC will shift in the opposite direction of the supply shock. A shift of AS to the left will shift SRPC up.

Question 16

5.2 v2: How is equilibrium restored in the AD/AS model and the Phillips Curve?

Answer 16

As the AD/AS model shifts to restore equilibrium, the Phillips Curve will change to restore equilibrium as well in response to the shift in AD/AS

Question 17

5.2 v2: What are the factors that shift the LRPC?

Answer 17

Decreasing frictional and / or structural unemployment will decrease LRPC and vice versa.
Increasing qualifications of the workforce for job openings decreases structural unemployment.
If people are able to find jobs easier and decrease downtime between jobs, frictional unemployment decreases.

Question 18

5.3 v1: What is a the equation of exchange?

Answer 18

MV = PY
Money supply * Velocity of money = Price level* real output
This equation is always true
Y may sometimes be replaced with Q but they mean the same thing

Question 19

5.3 v1: What is the velocity of money?

Answer 19

It is the number of times the unit of money exchange hands in a year

Question 20

5.3 v1: What does P * Y represent?

Answer 20

Nominal GDP

Question 21

5.3 v1: In the long run, how are price level and money supply related?

Answer 21

In the long run, changes in price level is going to result in a equal change in money supply and vice versa. This is a long run conclusion

Question 22

5.3 v1: How are real variables affected by a change in money supply in the long run

Answer 22

In the long, changes in money supply have no effect on real variables. This is a long run conclusion

Question 23

5.4 v1: What are, debts, deficits, and surpluses?

Answer 23

The total amount owed or accumulation of deficits minus surpluses.
The difference when spending is greater than income.
The difference when income is greater than spending

Question 24

5.4 v1: What is a budget?

Answer 24

A statement or plan of a government’s receipts and expenses needed to effectively and efficiently function

Question 25

5.4 v1: What is a government budget balance?

Answer 25

The difference between tax revenue and government spending

Question 26

5.4 v1: Where do government earn receipts, revenue, and income and what are government expenses or outlays?

Answer 26

The government earns receipts, revenue and income from taxes.
Government expenses or outlays is government spending and transfers

Question 27

5.4 v1: What are the three states the government balance budget can be in?

Answer 27

Balanced budget: Income = expenses
Budget Surplus: Income, revenue, taxes > Expenses, outlays, transfers
Budget deficit: Expenses, outlays, transfers > income, revenue, taxes

Question 28

5.4 v1: How does the fiscal policy affect budget balance?

Answer 28

Expansionary fiscal policy leads to deficits decreasing taxes and increasing government spending.
Contractionary fiscal policy leads to surpluses increasing taxes and decreasing government spending

Question 29

5.4 v1: what is a government budget surplus or deficit?

Answer 29

The difference between tax revenue and government purchases plus transfer payments in a given year.

Question 30

5.4 v1: What creates national debt?

Answer 30

A government’s continuous spending when in a budget deficit.

Question 31

5.4 v1: How does the government finance their deficit spending and interest on debt?

Answer 31

There will be a increase in the demand for money and loans increasing real interest rates

Question 32

5.4 v1: What are the effects of accumulated debt on a government?

Answer 32

A government must pay interest on accumulated debt increasing national debt and forgoing using those funds for alternative uses.

Question 33

5.5 v1: What is crowding out?

Answer 33

When government budget deficits have the negative effect of driving up interest rates leading to a reduction in investment due to expansionary fiscal policy

Question 33

5.5 v1: How does the expansionary fiscal policy close a recessionary gap.

Answer 33

The expansionary fiscal policy lowers taxes and increases spending shifting AD to equilibrium increasing Price level and employment.

Question 34

5.5 v1: How does a government budget deficit spending affect the loanable funds market graph?

Answer 34

when government budget deficit spending occurs there will be an increase in borrowing shifting the demand for loans to the right increasing real interest rates.

Question 35

5.5 v1: How does crowding out affect the loanable funds market graph.

Answer 35

Crowding out leads to less private investment spending causing prive level and employment to fall somewhat negating the affects of the expansionary fiscal policy.

Question 36

5.5 v1: how does investment spending affect economic growth?

Answer 36

Investment spending drives economic growth. A decrease in investment spending causes fewer capital goods to be produced relative to the economy’s productive capacity slowing economic growth.

Question 37

5.6 v1: What is GDP per capita and what does it compare?

Answer 37

GDP divided by the size of the population which is equal the average GDP per person.
GDP per capita is a key measure for comparing economies of other countries.

Question 38

5.6 v1: What is the definition of productivity?

Answer 38

Output per worker.

Question 39

5.6 v1: What is economic growth and how is it represented?

Answer 39

The increase of GDP per capita over time. The increase is represented by a outwards shift of LRAS and PPC.

Question 40

5.6 v1: What causes economic growth?

Answer 40

Changes in Physical capital, human capital and technology cause key changes in productivity which leads to growth.

Question 41

5.6 v1: What does the aggregate production function show?

Answer 41

It shows the positive relationship between productivity and quantity of human and physical capital per work as well as changes in technology.

Question 42

5.7 v1: What are supply-side fiscal policies?

Answer 42

Government policies that promote economic growth by influencing short-run and long-run aggregate supply

Question 43

5.7 v1: How can the government increase GDP per capita and economic growth?

Answer 43

By increasing investment and productivity through public policy.
Human capital per worker: Government spending on education and job training and or tax credits for education and job training.
Technology: Government spending on technology and or tax credits for research and development.
Physical capital per worker: Government spending on infrastructure and or tax credits for investment spending on physical capital.

Question 44

5.7 v1 How can the government increase productivity and the labor force participation rate?

Answer 44

By:
Increasing the age limit where individuals can collect retirement benefits.
Increasing the number of individuals to enter the labor force with tax credits.
Increasing spending on programs for older workers to continue working.

Question 45

5.7 v1: How is economic growth caused household benefits?

Answer 45

Tax cuts increase disposable income leading to a increase in savings and consumption increasing aggregate demand.
More savings increase the supply of loanable funds lowering interest rates.
Lower interest rates lead to more investment spending and capital stock formation eventually leading to economic growth (SRAS and LRAS increase)

Question 46

5.7 v1: How is economic growth caused by business benefits?

Answer 46

Businesses benefit from policies that make creating and running a business more efficient.
These policies help businesses increase GDP and create growth.
Businesses benefits from tax cuts and deregulation