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Econ 201

by: Beta A

Econ 201 Econ 201

Beta A
Minnesota State University, Mankato
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This 3 page Class Notes was uploaded by Beta A on Monday October 3, 2016. The Class Notes belongs to Econ 201 at Minnesota State University - Mankato taught by in Fall 2016. Since its upload, it has received 9 views.


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Date Created: 10/03/16
Economics 201 Macroeconomics Simonson Chapters 10, 11, and 12 Quiz Topics 1. Please explain how government spending, transfer payments, and taxes would be used to  conduct contractionary and expansionary fiscal policy. (How would discretionary policy  be used to correct a period of recession or inflation? How is expansionary/contractionary  policy attempting to influence aggregate demand?) Contractionary­ Reducing government spending  Reducing transfer payment Rasing taxes reduces aggregate demand Reduced inflation Expansionary­Increasing government spending Increase transfer payment Decrease tax Increases aggregate demand Increase inflation  2. Please explain what is meant by a transfer payment. Transfer payments are money payments directly paid to individuals. These include  payments for such items as Social Security, unemployment compensation, and welfare. In large measure, they represent our social safety net. We will ignore them as part of the  discretionary fiscal policy, because most are paid as a matter of law, but we will see later  in the chapter that they are very important as a way of stabilizing the economy 3. Please explain what is meant by discretionary fiscal spending (provide examples). discretionary spending The part of the budget that works its way through the  appropriations process of Congress each year and includes such programs as national  defense, transportation, science, environment, and income security. Some examples of the use of discretionary fiscal policy include tax cuts enacted during the Kennedy, Reagan, and George W. Bush administrations. These tax cuts were  designed to expand the economy under the belief that people would spend their tax  savings, both in the near term and the long run—they were meant to influence both  aggregate demand and aggregate supply. Tax increases were enacted under the George  H. Bush and Clinton administrations in the interest of reducing the government  deficit and interest rates. The Roosevelt administration used increased government  spending, although small amounts by today’s standards, to mitigate the impact of the  Great Depression. 4. What is the main idea of supply­side economics? Policies that focus on shifting the long­run aggregate supply curve to the right, expanding the economy without increasing inflationary pressures. Unlike policies to increase  aggregate demand, supply­side policies take longer to have an impact on the economy. 5. What is the main implication of the Laffer curve? Laffer curve Shows a hypothetical relationship between income tax rates and tax revenues. As tax rates rise from zero, revenues rise, reach a maximum, then decline until revenues reach zero again at a 100% tax rate. 6. What three main groups must agree in order to implement fiscal policy? Three disparate entities—the Senate, House, and the president—must collectively agree  on specific spending and tax policies. Ideally, these decisions are made in the open with  the public fully informed. The complexities of the budgeting process and its openness  (not a bad thing in itself) give rise to several inherent difficulties 7. Please explain what is meant by Automatic Stabilizers. (Give examples of automatic  stabilizers). automatic stabilizers Tax revenues and transfer payments automatically expand or  contract in ways that reduce the intensity of business fluctuations without any overt  action by Congress or other policymakers. Example  10.3 8. Please explain what is meant by a Cyclically Balanced Budget. (What should be done  with government spending and taxes when the economy is growing/declining?) cyclically balanced budget Balancing the budget over the course of the business cycle  by restricting spending or raising taxes when the economy is booming and using these  surpluses to offset the deficits that occur during recessions. 9. Please explain what is meant by an Annually Balanced Budget. What difficulty may it  pose for efforts by the government to counter the business cycle? annually balanced budget Federal expenditures and taxes would have to be equal each year. Most economists, however, believe such rules are  counterproductive. For example, during times of recession, tax revenues tend to fall due  to lower incomes and higher unemployment. To offset these lost revenues, an annually  balanced budget would require deep spending cuts or tax hikes (in other words,  contractionary policy) during a time when expansionary policies are needed. Many  economists believe that balanced budget rules of the early 1930s turned what probably  would have been a modest recession into the global Depression 10. Please explain what is meant by Functional Finance. functional finance Essentially ignores the impact of the budget on the business cycle and focuses on fostering economic growth and stable prices, while keeping the economy as  close as possible to full employment. 11. Please explain what is meant by a budget deficit versus a budget surplus. What is the  public debt? (How is it calculated?) 12. Please explain what is meant by the “Crowding Out Effect.” What is the implication for  the effectiveness of fiscal policy? (How does government spending affect interest rates,  consumption, and investment?) 13. What is Money? What are the primary functions of money? What is meant by  “Liquidity?” 14. Please explain what is meant by a Fractional Reserve Banking System. 15. Please explain what is meant by the Reserve Requirement. (What is the requirement  placed upon banks?) 16. What is the Money Multiplier? What is the relationship between the reserve requirement  and the money multiplier? How is the money multiplier calculated? 17. For any given new  deposit in a bank, how does the reserve requirement (and the money  multiplier) affect the money supply? 18. What are the basic goals (objectives) of the Federal Reserve System? 19. Please explain each of the following policy tools of the Federal Reserve: Reserve  Requirement, Discount Rate, Open Market Operations.  20. Assume that the Federal Reserve desired to use each of the policy tools (above) to  increase or decrease the money supply. How should each of the policy tools be used?  (Contractionary Monetary Policy is used to decrease the money supply. Expansionary  Monetary Policy is used to increase the money supply.) 21. What is the main policy tool of the Federal Reserve? Which policy tool is rarely used?


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