Ch.10

Question 1

Economics 12

Answer 1

Chapter 10 Vocabulary

Question 2

aggregate demand (AD)

Answer 2

The total demand for all goods and services produced in the economy.

Question 3

aggregate supply (AS)

Answer 3

The total supply of all goods and services produced in the economy.

Question 4

automatic stabilizers

Answer 4

Mechanisms built into the economy to help stabilize it by automatically increasing or decreasing aggregate demand, such as, Employment Insurance, welfare programs, and progressive taxes; often contrasted with discretionary fiscal policy.

Question 5

balanced budget

Answer 5

The situation that occurs when a government spends an equal amount to what it has collected in tax revenue.

Question 6

business cycle

Answer 6

Swings in national economic performance characterized by four phases; peak, contraction, trough, and expansion.

Question 7

circular flow of income

Answer 7

A model of the economy that sees the GDP as a total of all the money payments made to businesses and individuals.

Question 8

contractionary fiscal policy

Answer 8

Government policies to decrease aggregate demand through tax increases and/or decreased spending.

Question 9

crowding out

Answer 9

The theory that government borrowing drives up interest rates and reduces the amount of loanable funds, thereby making it more difficult for businesses to borrow.

Question 10

cyclical deficit

Answer 10

The part of the deficit that is incurred when the government is trying to pull an economy out of a recession.

Question 11

debt

Answer 11

The total amount that a government owes on money it has borrowed to fun deficit budgets in the past.

Question 12

decision lag

Answer 12

The time required for a government to decide on an appropriate fiscal policy after recognizing that an economic problem exists.

Question 13

deficit budget

Answer 13

The situation that occurs when the government spends more than it collects in taxes, causing a shortfall or deficit, which it must cover through borrowing.

Question 14

depression

Answer 14

A prolonged recession characterized by falling GDP, a very high unemployment, and price deflation.

Question 15

discretionary fiscal policy

Answer 15

Deliberate government action taken to stabilize the economy in the form of taxation or spending policies; often contrasted with automatic stabilizers.

Question 16

expansionary fiscal policy

Answer 16

Government policies to increase aggregate demand through tax cuts, increased spending, or both.

Question 17

fiscal policy

Answer 17

Government taxation, spending, and borrowing policies used to try to stabilize the economy.

Question 18

full-employment equilibrium

Answer 18

The intersection of aggregate demand and aggregate supply, at which full employment is reached and prices have started to rise.

Question 19

impact lag

Answer 19

The time required for a fiscal policy to bring about a change in the economy.

Question 20

implementation lag

Answer 20

The time required to implement an appropriate fiscal policy after making the decision to carry it out.

Question 21

inflationary gap

Answer 21

The gap between aggregate demand and full employment equilibrium; characterized by high inflation, low unemployment, and high GDP growth.

Question 22

infrastructure

Answer 22

The foundation of goods and services (such as roads, power grids, communication systems, schools, and hospitals) that allows an economy to operate efficiently.

Question 23

injection

Answer 23

Any expenditure (such as investment, government spending, and exports) that causes money to be put into the income-expenditure stream of the economy.

Question 24

leakage

Answer 24

Any use of income (such as saving, paying taxes, and spending on imports) that causes money to be taken out of the income-expenditure stream of the economy.

Question 25

marginal propensity to consume (MPC)

Answer 25

A measurement of the change in consumption divided by a change in income.

Question 26

marginal propensity to withdraw (MPW)

Answer 26

A measurement of the change in withdrawals from national income due to savings, taxes, and buying of imports divided by a change in income.

Question 27

multiplier effect

Answer 27

The multiplied effect upon the GDP that results from a change in people's income.

Question 28

progressive tax

Answer 28

A tax (such as income tax) that rises in percentage terms as an individual's income rises.

Question 29

prosperity cycle

Answer 29

An increase in aggregate demand leading to a cycle of higher production, more jobs, increased income, and greater consumption, resulting in even higher aggregate demand.

Question 30

recession

Answer 30

a contraction of the economy lasting longer than two business quarters (six months).

Question 31

recessionary gap

Answer 31

The gap between aggregate demand and full employment equilibrium characterized by high unemployment, low inflation, and low GDP growth.

Question 32

recognition lag

Answer 32

The time it takes a government to recognize a problem in the economy that requires an appropriate fiscal policy to correct.

Question 33

stabilization policies

Answer 33

Government intervention in the economy to try to stabilize it, using fiscal and monetary policies.

Question 34

structural deficit

Answer 34

The amount above the cyclical deficit that would exist even if the economy were operating at full employment.

Question 35

surplus budget

Answer 35

The situation that occurs when a government spends less than it collects in taxes, causing it to have money left over (a surplus).