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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