Macroeconomics Quiz Definitions

Question 1

Recession

Answer 1

Occurs when real GDP falls for at least two consecutive quarters. (Add to this based on the context of the question)

Question 2

Potential output

Answer 2

Output produced by an economy when it is at full employment equilibrium, or long-run equilibrium according to the monetarist/new classical model.

Question 3

Crowding out

Answer 3

The idea that expansionary fiscal policy is not very effective in increasing aggregate demand because the increased borrowing needs of the government to finance the increased expenditures could lead to increased interest rates. Thus, reducing private sector investment, consumer spending, and other components of AD.

Question 4

Automatic stabilizers

Answer 4

Institutionally built-in features (like unemployment benefits and progressive income taxation) that tend to decrease the short-term fluctuations of the business cycle without the need for governments to intervene.

Question 5

Market Based Supply Side policies

Answer 5

A set of policies based on well-functioning competitive markets in order to promote long-term economic growth, shown by increase in long-run aggregate supply. (goal is to promote long term economic growth)

Question 6

Interventionist Supply Side Policies

Answer 6

A set of policies that aim to increase an economy’s productive capacity that relies on a greater role for the government; these include expenditures on infrastructure, education, health care, research and developement, and all industrial policies. (goal is to promote long term economic growth)

Question 7

Expansionary Fiscal Policy

Answer 7

refers to an increase in government expenditures and/or a decrease in taxes that aim at increasing aggregate demand and thus real output and employment.

Question 8

Contractionary Fiscal Policy

Answer 8

Refers to a decrease in government expenditures and/or an increase in taxes that aim at decreasing aggregate demand and thus reducing inflationary pressures.

Question 9

Expansionary Monetary Policy

Answer 9

Monetary policy aiming at increasing aggregate demand through a decrease in interest rates; also referred to as easy monetary policy.

Question 10

Budget deficit

Answer 10

When government expenditures exceed government (tax) revenues usually over a period of a year.

Question 11

Government debt

Answer 11

The sum of all past budget deficits minus any budget surpluses; the total amount the government owes to domestic and foreign creditors.

Question 12

Full employment level of output

Answer 12

The level of output that is produced by the economy when there is only natural unemployment.