Expansionary Fiscal Policy 2. If the economy is experiencing a recession what type of fiscal policy would be in order?

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1 Stabilization Policies Reading Guide Chapters 12, 16, and 18 Chapter 12: Fiscal Policy 1. Assess the effect of fiscal policy on real output, price level, and the level of employment in the long run and the short run. 2. Examine the economic effects of government deficits budgets, including crowding out. 3. Define fiscal policy discretionary and nondiscretionary. 4. Define and measure the effect of built in stabilizers on the economy. 5. Consider issues surrounding the size and burden of he national debt Questions Fiscal Policy and the AD-AD Model p What is discretionary fiscal policy? Expansionary Fiscal Policy 2. If the economy is experiencing a recession what type of fiscal policy would be in order? 3. If the economy experiences a decline in real GDP, explain what happens to unemployment? 4. When the Federal government pursues expansionary fiscal policy what three options do they have to pick from? 5. What budgetary problem will the government experience if they use expansionary fiscal policy? 6. Explain why a small increase in government spending would result in an even larger increase in AD. 7. Explain why a tax cut would result in a smaller increase in AD than an increase in government spending. Contractionary Fiscal Policy 8. When would the government want to pursue contractionary fiscal policy? 9. When the Federal government pursues contractionary fiscal policy what three options do they have to pick from? 10. What budgetary problem will the government experience if they use contractionary fiscal policy? 11. Explain why a small decrease in government spending would result in an even larger decrease in AD.

2 12. Explain why a tax increase would result in a smaller decrease in AD than a decrease in government Spending. Financing of Deficits and Disposing of Surpluses p Explain the advantages and disadvantages of the two methods that may be used to finance a budget deficit: a. borrowing from the public b. money creation 14. Explain the advantages and disadvantages of the two things that can be done with a budget surplus: a. debt reduction b. impounding Built In Stability p Explain how a built in stabilizer works. Evaluating Fiscal Policy p Explain what the full-employment budget is. 17. What is a cyclical deficit? Problems, Criticisms, and Complications p Explain the timing problems that occur when pursuing fiscal policy: a. recognition lag b. administrative lag c. operational lag 19. How does politics effect the economic decisions that are made regarding fiscal policy? 20. What is crowding out?

3 Chapter 16: Extending the Analysis of Aggregate Supply 1. Gain understanding of how an economy responds to a short-run shock and adjusts in the long run in the absence of any public policy actions. 2. How the causes of inflation on an AD/AS model 3. Speculate on the role of inflationary expectations on price level andoutput Short-Run and Long-Run Aggregate Supply p You have read this section of the textbook previously. Read it again to refresh your memory! Demand Pull Inflation p When does demand pull inflation happen? 2. How is demand-pull inflation depicted graphically? Fill in the blank with increase or decrease. If there is an in aggregate demand the AD curve will shift rightward. The increase in AD causes the price level to. The increase in AD causes the real output to. Because of increased prices, workers realize that their REAL wages have. Eventually worker s nominal wages will. Since worker s wages are a major cost of inputs, aggregate supply will and the SRAS curve will shift to the left. Cost Push Inflation p What causes cost push inflation? Fill in the blank with increase or decrease. An in production costs shifts the SRAS curve leftward. When the SRAS curve shifts left, equilibrium price level will. If the government does not pursue expansionary policy, AD remains in place and real output will creating a recessionary gap. If expansionary policy is used, AD will and shift the AD curve to the right. This increase in AD will cause prices to once again. 4. Explain what happens if the cost push created recession is allowed to run its course with no government interference.

4 The Inflation-Unemployment Relationship p Draw and properly label the Phillips Curve. 6. Explain the relationship between unemployment and inflation that is suggested by the Phillips curve. 7. What is stagflation? 8. What is an aggregate supply shock? 9. What happens to the economy when there is an aggregate supply shock? The Long Run Phillips Curve p Draw a properly labeled graph that includes both a long run and short run Phillips curve. 11. In the long run, what will happen to unemployment when nominal wages catch up with inflation? 12. What is disinflation?

5 Chapter 18: Deficits, Surpluses, and the Public Debt 1. Examine the economic effects of government deficit budgets, including crowding out. Budget Philosophies p Explain what an annually balanced budget is. 2. Why might an economist argue that an annually balanced budget is a bad thing? 3. Explain what a cyclically balanced budget is. 4. What is the goal of functional Finance? The Public Debt: Facts and Figures p Explain why it is more meaningful to measure debt in relation to GDP. Substantive Issues p Explain how each of the following concerns relates to the national debt. a. Income distribution b. Incentives c. Foreign Owned Public Debt d. Crowding Out