1. During a recession, tax revenue
    fall and transfer payments rise, causing the economy to contract by less than it would in the absences of automatic stabilizers
  2. Activist fiscal policies
    usually produce budget deficits
  3. According to the Ricardian equivalence theorem, an increase inthe budge deficit as a result of higher gov. spending will cause households to
    expect an increase in taxes and therefore save more now
  4. According to the concept of crowding out the effect on AD of an increase in gov. spending will be partially offset by
    a decrease in investment spending as a result of higher interest rates
  5. When the gov. runs a deficit it must
    sell bonds to finance the deficit
  6. Fiscal policy is
    the changing of taxes and gov. spending in order to change aggregate demand and output
  7. Unemployment compensation payments to the unemployed
    fall during an expansion thereby slowing the expansion
  8. Which of the following would a new classical economist most likely suggest if the economy was in a recession
    cut taxes
  9. Assume that Obama achieves a dramatic increase in gov spending. An economist with a New Classical view would conclude that aggregate demand
    does not shift since the higher gov. spending is offset by lower consumption
  10. Crowding out occurs when
    gov. deficit spending increases interest rates
  11. If investment is relatively sensitive to interest rates, an increase in gov. spending that increases interest rates will
    not have much of an effect on AD
  12. According to the Ricardian equivalence theorem, gov, deficits do not affect output because people
    save more when the gov deficits increase
  13. According to the nuanced functional finance view expansionary fiscal policy
    decreases unemployment but increases interest rates
  14. During a recession, automatic stablizers
    reduce a budget surplus or increase a deficit
  15. Classical economists believe that the government
    should not borrow to finance gov spending except during wartime
  16. An economist who follows a functional finance principle is most liekly to suggest that when the economy is experiencing inflation the gov should
    run a surplus
  17. If the gov. increases the amount it borrows due to an increase in gov. spending interest rates will likely
  18. Fiscal policy would be more effective in stabilizing the economy if
    the gov could change taxes and spending rapidly
  19. The view that the gov budget should always be balanced except in wartime is
    sound finance
  20. If an economy is in a recession and the govenrment increases spending, an economist with a functional finance view would believe that
    AD likely wuld shift to the right
  21. Ricardian equivalence theorem
    theoretical proposition that deficits do not affect the level of output in the economy because individuals increase their savings to account for expected future tax payments to repay the deficit
  22. functional finance
    theoretical proposition, gov should make spending and taxing decisions on the basis of their effect on the economy, not on the basis of some moralistic principle that budgets should be balanced
  23. Multiplier model assumes
    • 1. financing the deficit doesn't have any offsetting effects
    • 2. gov knows what the situation is
    • 3. gov. knows the economy's potential income level - the highest level of income that doesn't cause accelerating inflation
    • 4. gov has flexibility in changing spending and taxes
    • 5. the size of the gov debt doesn't matter
    • 6. fiscal policy doesn't negatively affect other gov. goals
  24. automatic stabilizer
    gov program or policy that will counteract the bus cycle without any new gov action
  25. procyclical fiscal policy
    changes in gov spending and taxes that increase the cyclical fluctuations in the economy instead of reducing them
  26. new classical macroeconomics
    theoretical approach to macroeconomics that revived many prekeynesian theoretical ideas of the macro economy
Card Set
Chapter 14