ECON 2105 Chapter 13 Final Exam And
Detailed Answers.
social insurance programs - Answer government programs intended to protect families against
economic hardship.
ex) Medicare, Medicaid, Social Security
fiscal policy - Answer the use of taxes, government transfers, or government purchases of goods and
services to shift the aggregate demand curve.
- Changes in taxes and transfers indirectly affect GDP through changes in consumption spending (C) and
investment spending (I).
- Changes in government expenditures (G) directly affect GDP.
investment tax credit - Answer An investment tax credit is a tax break given to firms based on their
investment spending.
- This increases the incentive for investment spending.
Investment tax credits are often temporary, applying only to investment spending within a specific
period.
Like department store sales that encourage shoppers to spend a lot while the sale is on, temporary
investment tax credits tend to generate a lot of investment spending when they're in effect.
Even if a firm doesn't think it will need a new computer server or lathe for another year or so, it may
make sense to buy it while the tax credit is available, rather than wait
expansionary fiscal policy - Answer policy—an increase in government purchases, a reduction in taxes,
or an increase in government transfers—shifts the aggregate demand curve rightward (increasing
aggregate demand) and can close recessionary gap
, a budget surplus smaller or a budget deficit bigger.
contractionary fiscal policy - Answer policy—reduced government purchases, an increase in taxes, or a
reduction in government transfers—shifts the aggregate demand curve leftward (decreasing aggregate
demand) and can close inflationary gap
smaller government purchases of goods and services, smaller government transfers, or higher taxes—
increase the budget balance for that year, making a budget surplus bigger or a budget deficit smaller.
In the case of fiscal policy, there is an important reason for caution: there are significant _____ in its use.
- Answer lags
The lags occur because the government must:
- realize the recessionary/inflationary gap by collecting and analyzing economic data takes time to crunch
the numbers
- develop a spending plan takes time to go through the political process (particularly in the U.S., the way
Congress operates these days)
- implement the action plan (i.e. spend the money) takes time for the spending plan to be carried out
fiscal policy has a ________ on the economy - Answer multipler effect
_________ leads to an increase in real GDP larger than the initial rise in aggregate spending caused by
the policy. - Answer expansionary fiscal policy
__________ leads to a fall in real GDP larger than the initial reduction in aggregate spending caused by
the policy. - Answer contractionary fiscal policy
The size of the shift of the aggregate demand curve depends on the ___________ - Answer type of
fiscal policy
Detailed Answers.
social insurance programs - Answer government programs intended to protect families against
economic hardship.
ex) Medicare, Medicaid, Social Security
fiscal policy - Answer the use of taxes, government transfers, or government purchases of goods and
services to shift the aggregate demand curve.
- Changes in taxes and transfers indirectly affect GDP through changes in consumption spending (C) and
investment spending (I).
- Changes in government expenditures (G) directly affect GDP.
investment tax credit - Answer An investment tax credit is a tax break given to firms based on their
investment spending.
- This increases the incentive for investment spending.
Investment tax credits are often temporary, applying only to investment spending within a specific
period.
Like department store sales that encourage shoppers to spend a lot while the sale is on, temporary
investment tax credits tend to generate a lot of investment spending when they're in effect.
Even if a firm doesn't think it will need a new computer server or lathe for another year or so, it may
make sense to buy it while the tax credit is available, rather than wait
expansionary fiscal policy - Answer policy—an increase in government purchases, a reduction in taxes,
or an increase in government transfers—shifts the aggregate demand curve rightward (increasing
aggregate demand) and can close recessionary gap
, a budget surplus smaller or a budget deficit bigger.
contractionary fiscal policy - Answer policy—reduced government purchases, an increase in taxes, or a
reduction in government transfers—shifts the aggregate demand curve leftward (decreasing aggregate
demand) and can close inflationary gap
smaller government purchases of goods and services, smaller government transfers, or higher taxes—
increase the budget balance for that year, making a budget surplus bigger or a budget deficit smaller.
In the case of fiscal policy, there is an important reason for caution: there are significant _____ in its use.
- Answer lags
The lags occur because the government must:
- realize the recessionary/inflationary gap by collecting and analyzing economic data takes time to crunch
the numbers
- develop a spending plan takes time to go through the political process (particularly in the U.S., the way
Congress operates these days)
- implement the action plan (i.e. spend the money) takes time for the spending plan to be carried out
fiscal policy has a ________ on the economy - Answer multipler effect
_________ leads to an increase in real GDP larger than the initial rise in aggregate spending caused by
the policy. - Answer expansionary fiscal policy
__________ leads to a fall in real GDP larger than the initial reduction in aggregate spending caused by
the policy. - Answer contractionary fiscal policy
The size of the shift of the aggregate demand curve depends on the ___________ - Answer type of
fiscal policy
