Download Section IV Vocabulary review Matching Social insurance automatic

Section IV Vocabulary review Matching
Social insurance
automatic stabilizers
expansionary fiscal policy
stagflation
Contractionary fiscal policy output gap
inflationary gap
recessionary gap
Supply shock
demand shock
potential output
sticky wages nominal wage
Wealth effect
monetary policy
fiscal policy
interest rate effect
lump-sum tax
Planned investment spending
autonomous consumer spending
consumption function
1. __________________________________ is the investment spending that a business intends to do
during a given period.
2. __________________________________is the level of real GDP the economy would produce if all
prices were fully flexible.
3. _____________________________ are nominal wages that are slow to react in the face of high
unemployment or when there are labor shortages.
4. ______________________________ is the dollar amount of the wage paid.
5. ______________________________ is an event that shifts the aggregate demand curve. An example
would be the Housing Crash in 2008.
6. A combination of inflation and falling aggregate output is called __________________________.
7. An event that shifts the short-run aggregate supply curve such as a disruption in the global oil supply is
called ________________________.
8. When aggregate output is below potential output the economy is experiencing a ________________
_______________________.
9. The ____________ _________ is the percentage difference between actual aggregate output and
potential output.
10. Programs that the government uses to protect families against economic hardship are called entitlements
and also called _____________ ________________.
11. A recessionary gap is when aggregate demand is below potential output. When the government uses
____________________________________________ it increases demand.
12. _____________________________________________ reduces aggregate demand and is used to
correct inflationary gaps.
13. Government spending and taxation rules that cause fiscal policy to be automatically expansionary when
the economy contracts and automatically contractionary when the economy expands are known as
_____________________________ ______________________.
14. A change in investment and consumer spending because of the lowering or raising of interest rates is
called ________________________________.
15. ______________________________________________ is fiscal policy that is a result of actions by
government officials rather than rules.
16. The ________________ ________________ is the change in consumer spending caused by a change
in purchasing power of consumer’s assets.
17. Taxes that don’t depend on the taxpayer’s income are called ___________ _________ __________.
18. Economic policy set by the Federal Reserve Bank to stabilize the economy is known as
__________________________.
19. The amount of money a household would spend if it had no disposable income is known as
_____________________________________________________________.
20. When the government uses taxation, government transfers and government purchases to shift aggregate
demand it is known as _____________ _________________.
21. _____________________ ______________________ shows how an individual household’s consumer
spending is determined by its current disposable income.
MPC: Marginal Propensity to Consume
MPS: Marginal Propensity to Save
REVIEW p. 205 of your textbook
MPS+MPC= 100
Complete the following
Review problem:
22. Assume the MPC in an economy is 0.8 and the government increases government purchases of goods
and services by $50 million. Also assume the absence of taxes, international trade, and changes in the
aggregate price level.
a. What is the value of the multiplier?
b. By how much will real GDP changes as a result of the increase in government purchases.
c. What would happen to the size of the effect on real GDP if the MPC fell? Explain.
d. If we reals the assumption of no taxes, automatic changes in tax revenue as income changes will
have what effect on the multiplier?
23. A change in government purchases of goods and services results in a change in real GDP equal to $200
million. Assume the absence of taxes, international trade, and changes in the aggregate price level.
a. Suppose that the MPC is equal to .75. What was the size of the change in government purchases of
goods and services that resulted in the increase in real GDP of $200 million?
b. Now suppose that the change in government purchases of goods and services was $20 million. What
value of the multiplier would result in an increase in real GDP of $200 million?
c. Given the value of the multiplier you calculated in part b, what marginal propensity to save would
have led to that value of the multiplier?
Complete #12 and 13 on p 218 of your textbook. Bring all of this to class on Tuesday. Work on your
study guide