Economic Concepts and Fiscal Policy

Flashcards for reviewing key economic concepts and fiscal policy topics based on the lecture notes.

What factor leads to business cycle events according to real business cycle theory?

Changes in the growth rate in productivity.

What can start inflation?

An increase in aggregate demand or a decrease in aggregate supply.

What initiates demand-pull inflation?

An increase in aggregate demand.

Increases in the quantity of money can start a inflation and an increase in government expenditure can start a inflation.

Demand-pull; demand-pull.

Which of the following is NOT a potential cause of demand-pull inflation?

An increase in taxes.

What happens to long-run equilibrium when there is an initial increase in aggregate demand that is not followed by an increase in the money quantity?

A higher price level but the same real GDP.

Why does demand-pull inflation persist?

Continuing increases in the quantity of money.

If the AD and SAS curves intersect at a level of real GDP exceeding potential GDP without government intervention, what happens?

The SAS curve shifts leftward because the money wage rate rises.

What are the main sources of cost-push inflation?

Increases in money wage rates and the cost of raw materials.

What could cause a cost-push inflation if GDP equals potential GDP?

A large crop failure that boosts the prices of raw food materials.

How does an increase in the money wage rate affect the SAS curve?

It shifts the SAS curve leftward.

What is stagflation?

The combination of a rising inflation rate and a decreasing real GDP.

What results if the Fed responds to repeated decreases in short-run aggregate supply by increasing the quantity of money?

Continuous inflation.

What will happen to the trend inflation rate if the velocity of circulation and potential GDP each grow by 2 percent while the quantity of money grows by 0 percent?

The trend inflation rate will equal zero.

To end a deflation, what must the government do?

Increase the quantity of money.

What does the Phillips curve show the relationship between?

The unemployment rate and the inflation rate.

What describes the short-run Phillips curve?

It slopes downward.

What does moving along the short-run Phillips curve indicate?

A tradeoff between inflation and unemployment.

Where do the short-run and long-run Phillips curves intersect?

At the expected inflation rate and the natural unemployment rate.

What was the primary purpose of the federal budget before the Great Depression?

Finance the activities of the government.

What does fiscal policy include?

Decisions related to government expenditure on goods and services, transfer payments, and tax revenue.

Which component is NOT part of fiscal policy?

Controlling the money supply.

Which government body does NOT participate directly in U.S. fiscal policy formulation?

The Federal Reserve Board.

What is the largest source of government revenues?

Personal income taxes.

What item accounts for the largest government outlays?

Transfer payments.

What happens when tax revenues exceed outlays?

The government has a budget surplus.

What is true if the government runs a surplus?

The total amount of government debt is decreasing.

What characterizes automatic fiscal policy?

It requires no legislative action to be effective.

What is an example of discretionary fiscal policy?

The stimulus package passed by Congress in 2009.

How can the government minimize the effects of spending fluctuations?

By changing government expenditures on goods, changing taxes, or changing government expenditures on services.

Why does the government budget deficit tend to decrease during economic expansions?

Because tax revenues increase and government transfer payments decrease.

How does an increase in government expenditure affect the AD curve?

It shifts the AD curve rightward.

What fiscal policy would increase real GDP if real GDP is less than potential GDP?

An increase in government expenditure and/or a decrease in taxes.

Which fiscal policy would decrease real GDP and the price level if the economy is at a short-run equilibrium greater than potential GDP?

An increase in taxes.

What are some limitations of fiscal policy?

There can be a lag between recognizing the need for fiscal policy and its actual effect.