unit 5 test

Question 1

putting fiscal and monetary policy together:

Answer 1

• policymakers need to work together to achieve economic goals
• economic policies do not exist in a vacuum
• policymakers = government

Question 2

expansionary fiscal policy:

Answer 2

when the gov is in a recessionary gap
tools:
government spending increases
taxes decrease

Question 3

expansionary monetary policy:

Answer 3

• to help get out of a recessionary gap*
  tools:
• decrease reserve ratio
• decrease discount rate
• buy bonds

Question 4

contractionary fiscal policy:

Answer 4

when in an inflationary gap

tools:
- decrease government spending
- increase taxes

Question 5

contractionary monetary policy:

Answer 5

when in an inflationary gap

tools:
- increase reserve ratio
- increase discount rate
- sell bonds

Question 6

how does expansionary fiscal policy affect rGDP?

Answer 6

increase AD
increased output
decreased unemployment
higher PL

Question 7

how does contractionary fiscal policy affect rGDP?

Answer 7

increase taxes
decrease consumer investment
decrease AD

Question 8

how does expansionary monetary policy affect rGDP?

Answer 8

increase money supply 
increases output and consumer spending 
decrease interest rates 
increase investment spending 
increase AD

Question 9

how does contractionary monetary policy affect rGDP?

Answer 9

decrease money supply 
increase interest rates 
increase price level 
decrease AD 
decrease real GDP

Question 10

the phillips curve:

Answer 10

• shows the tradeoff between inflation and unemployment

- usually inverse relationship

Question 11

The Phillips Curve and changes to aggregate demand:

Answer 11

when AD increases = inflation is high and unemployment is low
when AD decreases = inflation is low and unemployment is high
when AD shifts there is a movement along the SRPC

Question 12

the phillips curve and changes to the short-run aggregate supply

Answer 12

AS increases = inflation is low and unemployment is low
AS decreases = inflation is high and unemployment is high
when AS shifts, there is a shift on the SRPC

Question 13

the velocity of money:

Answer 13

average times a dollar is spent and re-spent in a year

Question 14

quantity theory of money:

Answer 14

MxV=PxY
PxY is nominal GDP 
M=Money Supply 
P=Price Level 
V=Velocity 
Y=Quantity of Output

Question 15

money and inflation:

what happens in the long-run when the central bank increases the money supply?

Answer 15

• short-run spending eventually leads to higher resource prices and inflation
• if inflation is bad enough, banks do not lend and the economy tanks

Question 16

deficit spending:

Answer 16

the trade-off increasing government spending without raising taxes to close a recessionary gap

Question 17

budget deficit:

Answer 17

when annual government spending and transfer payments are greater than tax revenue

Question 18

budget surplus:

Answer 18

when annual government spending and transfer payments are less than tax revenue

Question 19

national debt:

Answer 19

• the accumulation of all the budget deficits over time

- government increases spending without increasing taxes, they will increase the annual deficit and national debt

Question 20

entitlements:

Answer 20

whenever a federal program that requires payments to any eligible person or unit of government (mandatory spending must be paid)
- ex: social security

Question 21

crowding out:

Answer 21

• the adverse effect of government borrowing on interest-sensitive private sector spending
• refers to a decrease in private investment due to an increase of borrowing by the government

Question 22

if the government increases deficit spending, what happens to the loanable funds market?

Answer 22

• demand increases
• real interest rate increases
• quantity of private loans decreases
• economic growth in the long run decreases

Question 23

what do economists use to measure economic growth and standard of living?

Answer 23

• REAL GDP PER CAPITA: the real divided by the population
• growth rate: change in real GDP per capita over time
• not nominal GDP since it doesn’t account for inflation
• not real GDP because it doesn’t account for population

Question 24

government policies that result in long-run economic growth:

Answer 24

1. education/ training spending
   - increases human capital
2. infrastructure spending: public works like roads, bridges, and harbord
   - increases physical capital
3. production/investment incentives programs: investment tax credits
   - increase physical capital stock
   - these are called “supply side policies”

Question 25

supply-side fiscal policy:

why is this controversial?

Answer 25

• government policies designed to increase production by reducing business taxes and/or regulations
• 1. providing tax breaks to businesses might disproportionately benefit the wealthy
     
     2. it assumes that corporations will spend tax cuts on investments rather than payout shareholders

Question 26

fiscal policy and economic growth:

Answer 26

• government spending does not necessarily result in economic growth
• only spending that increases productivity and technology