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Name ____________________________
Chapter
Date ________________
Period _______
Outlining the Chapter
15
Look over the chapter and pay attention to the main topics. As you look through each section, fill
in the missing terms in the outline.
I.
Fiscal Policy
A. Types of fiscal policy
1. ____________________ fiscal policy increases ___________________
_________________ or reduces ____________ (or both).
a. It attempts to directly increase total spending in the economy and indirectly
reduce the _________________ rate.
2. ________________ fiscal policy decreases ________________ ______________
or increases ____________ (or both).
a. It attempts to directly contract total spending in the economy and indirectly
reduce ________________.
B. Expansionary fiscal policy and unemployment
1. A ___________ unemployment rate results from people not _________________
enough money in the economy.
2. To reduce unemployment, Congress could implement ____________________
fiscal policy.
3. As a result of government _________________ its spending, there will be
____________ total spending in the economy.
4. As a result of ________________ total spending, firms __________ more goods.
5. When firms start to sell more goods, they hire ____________workers to produce
the additional goods.
6. Unemployment goes _____________ as ________________ people are working.
C. ____________________ _____________ occurs when increases in government
spending lead to reductions in private spending (by consumers and businesses).
1. Because the government spends _______________ on goods and services,
people now need to spend _______________.
2. ___________________ ____________________ ___________ occurs when
each dollar __________________ in government spending is matched by a dollar
___________________ in private spending.
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Name ____________________________
Date ________________
Period _______
a. An _______________ in government spending does not raise total
spending and does not affect unemployment.
3. ______________ ______________ ______ occurs when a ______________ in
private spending only partially offsets an ________________ in government
spending.
a. An increase in government spending does raise total spending in the economy.
D. Keynes on the economy
1. Keynes’s major work was The General Theory of _________________,
________________, and ________________.
2. Keynes argued that _________ _____________ spending in the economy was
the cause of high ___________________.
3. Before Keynes, most economists thought it was impossible for too little spending
in an economy to cause high _________________.
4. Keynes stated that even if people weren’t spending much money, firms might not
____________ prices to sell more goods.
a. Firms do not cut prices because they first wait for wages paid to workers to
_______________ and workers initially ____________ wage cuts.
b. If wages don’t come down quickly, and sellers are not reducing prices, people
may be ___________ ________ from their jobs because consumers aren’t
spending enough for full employment to exist.
5. Keynes argued that total spending in the economy must be raised through
_____________ ______________.
6. Critics argue that Keynes’s proposal to enact _________________ fiscal policy
did not take into account _________________ _________.
7. Critics also say Keynes opened the door to government involvement in the
economy.
E. Contractionary fiscal policy and inflation
1. Inflation is the result of ___________ ______________ spending in the economy.
2. To reduce prices, Congress can implement __________________ fiscal policy by
______________ government ______________, ______________ taxes, or both.
3. For example, a ___________ in government spending will lead to ____________
spending in the economy.
4. As a result of the _________________ in total spending, firms initially sell fewer
goods.
5. As a result of selling fewer goods, firms have surplus goods on hand.
6. To get rid of the surplus goods firms ______________ prices.
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Name ____________________________
Date ________________
Period _______
F. ______________ ______ occurs when decreases in government spending
lead to Increases in private spending.
1. This occurs when government ________________ its spending on goods and
services. As a result, people ________________ their spending on ___________
goods and services.
2. Such a dollar-for-dollar tradeoff is referred to as _____________ _____________
_______. For every dollar ________________ in government spending on goods,
there is a dollar ___________________ in private spending on goods.
3. ________________ crowding in results in no change in total spending in the
economy.
4. Then a _________________ in government spending will not lead to a
_________________ in total spending in the economy, and prices will not go
_____________.
G. Fiscal policy and taxes
1. How taxes can affect the spending (demand) side
a. After-tax income is the income people have left over after paying their
_______________.
b. If the government lowers taxes, then people’s after-tax income ____________.
c. As after-tax income rises, people have _____________ money to spend on
consumption.
d. As a result, total spending in the economy __________ as a result of a tax cut.
e. Firms sell ______________ goods and so they hire _____________ workers.
f. Things work in the opposite direction for tax increases.
2. How taxes affect the producing (supply) side
a. The _______________ your after-tax income, the ___________ you are willing
to work; the _____________ your after-tax income, the ____________ you are
willing to work.
b. There will a _______________ supply of goods and services in the economy
(AS curve shifts ______________) when taxes are _____________ than when
they are ________________.
H. Tax rates and tax revenues
1. Taxes paid = _________________ tax rate times _________________.
2. Tax cuts encourage people to work more. In some cases, they may work so much
more that tax revenues _________________.
3. _______________ __________ _________________ believe that __________ in
high tax rates can generate ____________ tax revenues whereas cuts in low tax
rates generate lower tax revenues.
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Name ____________________________
Date ________________
Period _______
4. The _____________ __________ illustrates the relationship that some
economists believe exists between tax rates and tax revenues.
II.
Monetary Policy
A. Types of monetary policy
1. Expansionary monetary policy and unemployment
a. The Fed ________________ the money supply.
b. A ______________ money supply is usually associated with ______________
total spending in the economy.
c. As a result of ________________ spending in the economy, firms will begin to
sell ____________ products.
d. As firms sell ____________ products, they will hire ____________ workers.
This will _____________ the unemployment rate.
e. _________________ ________ does not arise with monetary policy.
2. Contractionary monetary policy and inflation
a. The Fed _________________ the money supply.
b. A ______________ money supply is usually associated with ______________
total spending in the economy.
c. As a result of the _________________ in spending in the economy, firms
begin to sell ___________.
d. As firms sell ____________ products, their inventories ____________. In
order to get rid of surplus goods, firms _______________ prices.
B. Monetary policy and the exchange equation
1. How should the Fed maintain a stable price level?
2. The percentage change in the money supply equals:
%M % _______ % _______ % _______
3. Some economists say that monetary policy should raise the money supply by an
amount that keeps prices ___________ (%P 0.)
III. Stagflation: The Twin Maladies Appear Together
A. Rising unemployment and inflation
1. Stagflation occurs when an economy experiences high ______________ and
high __________________.
B. How money changes affect the economy: Output first, prices second.
1. Some economists believe that stagflation is the result of a stop-and-go, on-and-off
_________________ policy.
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Name ____________________________
Date ________________
Period _______
C. What causes stagflation?
1. The Fed _________________ the money supply. This first _____________
output and then ______________ prices.
2. The ___________________ money supply has caused inflation.
3. At the same time people are dealing with the ______________ inflation, the Fed
________________ the money supply. As a result, output falls.
4. Since less output is being produced, _____________ people are required to work
in the factories, and so unemployment ______________.
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Name ____________________________
Chapter
Date ________________
Period _______
Building Vocabulary
15
Fill in the blanks with the correct terms from the following list of economic concepts.
contractionary fiscal policy
crowding in
expansionary fiscal policy
fiscal policy
Laffer curve
stop-and-go, on-and-off monetary policy
contractionary monetary policy
crowding out
expansionary monetary policy
Keynes
stagflation
1. Changes the government makes in spending or taxation to achieve particular economic
goals are known as ____________________________.
2. _____________________________________ occurs when the Fed decreases the money
supply.
3. The occurrence of high inflation and high unemployment at the same time is called
____________________.
4. ______________________________________________occurs when the money supply is
increased, then decreased, then increased, and so on.
5. The situation in which increases in government spending lead to a reduction in private
spending is known as ________________________.
6. _________________________ occurs when decreases in government spending lead to an
increase in private spending.
7. ________________________________ occurs when the Fed increases in the money
supply.
8. A decrease in government spending or an increase in taxes is
____________________________________________.
9. The _______________________ states that as tax rates rise from zero, tax revenues rise,
reach a maximum at some point, and then fall with further increases in tax rates.
10. ________________ argued that too little spending in the economy was the cause of high
unemployment.
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Name ____________________________
Chapter
Date ________________
Period _______
AS YOU REVIEW
15
Practicing for the Test
True of False: Place a T in the space if the statement is true, and an F if the statement is false.
_____
1. The occurrence of inflation and high unemployment at the same time is called
crowding in.
_____
2. Expansionary fiscal policy is the main cause of stagflation.
_____
3. Contractionary monetary policy is when the Fed decreases the money supply.
_____
4. Monetary policy refers to changes Congress makes in spending or taxation or
both to achieve particular economic goals.
_____
5. Expansionary monetary policy increases the money supply and ultimately
decreases the unemployment rate.
_____
6. Contractionary monetary policy can be used to reduced inflation.
_____
7. A reduction in income tax rates leaves more after-tax income for people, so they
end up spending more.
_____
8. Suppose that %Q 10% and %V 3%, then the percent change in the
money supply should equal 13% in order to keep the price level stable.
_____
9. The Laffer curve shows that two tax rates can generate the same tax revenue.
_____
10. Contractionary fiscal policy calls for decreasing government spending, or
increasing taxes, or both.
Short Answer:
1. Explain how contractionary fiscal policy may reduce inflation.
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