Midterm Exam - Chaper 21

Question 1

Which presidents lowered taxes to shift AD?

Answer 1

Kennedy, Reagan, and G.W. Bush.

Question 2

Which is more powerful, a change in taxes or a change in government spending?

Answer 2

Change in government spending is more powerful because it leads to a large increase in GDP when compared to the same changes in taxes.

Question 3

Too much spending results in what?

Answer 3

Inflationary spiral. Prices are then pushed up until workers adjust their expectations to the higher price level. The economy moves to a point beyond full employment

Question 4

What are contractionary fiscal policy

Answer 4

Policies that decrease aggregate demand to contract output in an economy. These include reducing government spending, reducing transfer payment, and/or raising taxes.

Question 5

What is expansionary fiscal policy?

Answer 5

Policies that increase aggregate demand to expand output in the economy. These includes increasing government spending, increasing transfer payments and/or decreasing taxes.

Question 6

What are automatic fiscal stabilizers?

Answer 6

Tax revenues and Transfer payments automatically expand or contract in ways that reduce the intensity of business fluctuations without overt action by Congress

Question 7

When the government is spending more than it has revenue, what happens?

Answer 7

A deficit occurs. This is the amount by which annual government expenditures exceed tax revenues

Question 8

What is the cost of the federal deficit?

Answer 8

Increase national and public debt. Interest payments on this debt is 1.5% of GDP. Raised taxes will be needed.

Question 9

Which counties have the highest debt to GDP ratios?

Answer 9

Japan, Greece and Italy