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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. Study Guide 162 © NTC/Contemporary Publishing Group, Inc. 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. Study Guide 163 © NTC/Contemporary Publishing Group, Inc. 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. Study Guide 164 © NTC/Contemporary Publishing Group, Inc. 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. Study Guide 165 © NTC/Contemporary Publishing Group, Inc. 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 ______________. Study Guide 166 © NTC/Contemporary Publishing Group, Inc. 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. Study Guide 167 © NTC/Contemporary Publishing Group, Inc. 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. Study Guide 170 © NTC/Contemporary Publishing Group, Inc.