Download Chapter 17 Worksheet Section 1 – Achieving Economic Stability

Chapter 17 Worksheet
Section 1 – Achieving Economic Stability (pages 418 – 421)
1. List 2 statistics used to identify the problems of growth & economic instability. Review
440
a. GDP gap
b. Misery index
2. List 4 social costs of instability.
a. Wasted resources
b. Political instability
c. High crime rates
d. Increase in bankruptcy
3. What happens to employment if GDP declines even a fraction of a percentage? Cap 418
a. Employment declines
4. Why is the misery index also called the discomfort index?
a. It indicates discomfort consumers suffer because of high inflation & unemployment
5. What does a point inside the Production Possibilities Frontier show? CD 419, 418 graph
a. The opportunity cost measured in terms of output NOT produced because some
resources were not working to their fullest potential
6. What are some benefits of a healthy economy?
a. Society can more easily deal with social problems
7. How do economists measure the economic cost of instability? Review 421
a. They measure it in terms of the GDP gap & the misery index.
8. What are the 4 social costs of instability?
a. Resources are wasted
b. Political stability is threatened
c. Crime rates increase
d. Social problems increase
9. If the GDP gap in a given year rises dramatically, what types of unemployment &
inflation data would b e present?
a. Unemployment will rise & inflation will taper off
Section 2 – Macroeconomic Equilibrium (pages 422 – 425)
1. What 7 factors might lower production costs for all firms and cause aggregate supply to
increase? QC 423 Review 425
a. Discovery of less expensive natural resources
b. Lower prices for imported oil
c. Lower interest rates
d. Increased labor productivity
e. New technologies
f. Lower taxes
g. Liberalization of immigration laws
2. How do higher taxes affect aggregate supply?
a. They cause it to decrease
3. What causes a decrease in aggregate supply? Cap 423
a. Any increase in cost that will cause firms to offer fewer goods
4. Which way would the aggregate supply curve move if the price of imported oil doubled?
VI 423
a. To the left
5. What assumption is made about the downward-sloping aggregate demand curve is
based on? VI 424, ans in 2nd paragraph under The Aggregate Demand Curve
a. That the size of money supply is fixed
6. What are the factors that would cause aggregate demand to decrease? Review 425
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Chapter 17 Worksheet
a. Expectations of a bleak economic or political climate
b. Higher taxes
c. Lower transfer payments
d. Decrease in government, consumer, or business spending
7. What are the policy objectives economic policymakers face?
a. To stimulate real GDP without increasing inflation
8. How do aggregate supply & demand differ from simple supply & demand?
a. Aggregate supply & demand show how price level & total output are determined for the
economy as a whole
b. Supply & demand show how price & quantity are determined in an individual market
9. How would a decrease in business investments affect the macroeconomic equilibrium?
a. It would cause workers to lose jobs & spend less.
b. Aggregate demand would decrease
c. Real GDP would fall
d. Price level would decline
10. Why are aggregate supply & demand curves useful economic tools?
a. They can be used to indicate the way & direction the economy will change.
11. Why is it important to not increase the price level?
a. It will cause inflation
12. What is the difference between the supply curve of a firm & the aggregate supply curve.
Review 440
a. Supply curve of a firm
i. Upward sloping
ii. Individual prices on the vertical axis
b. Aggregate supply curve
i. Upward sloping
ii. Horizontal as well as vertical range
iii. Price level is on the vertical axis
13. List 5 factors that would cause the aggregate demand curve to increase.
a. Decrease in savings
b. Increase in consumer spending
c. Improved expectations
d. Increase in government spending & transfer payments
e. Decrease in taxes
14. What is meant by macroeconomic equilibrium?
a. When the quantity of real GDP demanded is equal to the real GDP supplied at a given
price level.
Section 3 – Stabilization Policies (pages 427 – 434)
1. What is the goal of demand-side economics? CD 428
a. It argues for more government involvement in the economy during recessions or down
periods. The hope is that with more people working due to government projects,
demand for products will increase & stimulate the economy
2. Does Keynesian economics always call for direct government spending to stimulate the
economy? What does it call for? VI 428
a. NO. Keynesian economics calls for the government to take an indirect role by lowering
taxes & taking other steps that would encourage business & consumer spending
3. Keynesian economics states that economic activity will be stimulated if the federal
government invests in projects such as hydroelectric plants. Cap 428
4. What role do government deficits have according to the Keynesian theory? Cap 428
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Chapter 17 Worksheet
a. They have a temporary but important role, because they are needed to halt further
declines in business.
5. What are 2 limitations of fiscal policy? Cap 429
a. The federal government has difficulty in controlling spending
b. Planning government spending to offset changes in investment spending is almost
impossible
6. What did Keynes believe to be the only way to offset changes in investment sector
spending? QC 429
a. For government to step in & counteract declines in investment spending by introducing
its own spending & tax cuts
7. List 2 examples of automatic stabilizers?
a. Unemployment insurance
b. Federal entitlement programs
8. Why is Supply-Side economics so named? VI 430
a. Designed to increase output
9. Why is Demand-Side economics so named?
a. To increase demand
10. According to Keynesian theory, how should declines in business spending be offset?
a. By increased government spending
11. What are the most effective counter-cyclical fiscal policies used today?
a. Automatic stabilizers such as unemployment insurance & entitlements
12. What role did the Laffer curve play in the economic policies of the 1980s? Cap 432
a. It was the basis for President Reagan’s tax cut of 1981
13. What does the Laffer Curve display? - QC 433
a. Supply-side economics
14. According to monetarists, how do fluctuations in the money supply affect the economy?
a. They destabilize the economy, causing unemployment & inflation
15. What are some examples of supply-side policies? Cap 433
a. Reducing g number of federal agencies
b. Deregulation
c. Tax cuts
16. What are the objectives of demand-side policies. Review 434
a. To achieve steady economic growth & low unemployment by affecting aggregate
demand
17. What are the main assumptions of supply-side policies?
a. If taxes, government regulations, & government spending are decreased, businesses &
individuals will produce & spend more
b. Increased investment & productivity would lead to increased output
18. Name the 3 tools of monetary policy
a. Open market operations
b. Discount rate
c. Change in the reserve requirement
19. How do demand-side policies & supply-side policies differ?
a. Supply-side policies want the government to take a smaller role in economic affairs
b. Demand-side policies want to stimulate output by generating demand with increased
levels of government spending
20. What are the major tools of fiscal policy? Review 440
a. Spending and/or taxation policies to influence economic activity
b. Automatic stabilizers such as underemployment insurance
c. Entitlements
21. List the main assumptions of the supply-siders.
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Chapter 17 Worksheet
a. That deregulation & lower taxes will give businesses & consumers more incentive to
produce & spend, thus increasing revenue collections because of the extra activity
22. What are the short-term & long-term impacts of monetary policy?
a. Short term – can affect interest rates & perhaps unemployment
b. Long term – expansionist monetary policy can cause inflation
Section 4 – Economics & Politics (pages 436 – 438)
1. What is the Council of Economic Advisers?
a. 3 member body that reports to President on economy & economic policies.
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