Econ help

Assignment #10: Test #3 Review Econ 1 - Macroeconomics

Concept #1: Fiscal Policy 1. What are the two ways governments can use “Fiscal Policy” to stimulate the economy? ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________

2. What are the two ways governments can use “Fiscal Policy” to control inflation in the economy? ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________

3. How would a supply-side economist use “Fiscal Policy” to stimulate the economy? ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________

4. What is an automatic stabilizer? Give two examples of how automatic stabilizers

would automatically help stabilize the economy during a recessionary period.

______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

5. What is crowding out and how does it effect the results of fiscal policy?

______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________

______________________________________________________________________

6. Suppose the mpc is currently .8 and government is trying to stimulate the

economy. How much would each of the following situations increase aggregate

incomes?

a. Increase government spending by $200,000,000,000

b. Decrease taxes by $200,000,000,000

c. Increase government spending by $1billion and decrease taxes by $1 billion

Concept #2: The Paradox of Thrift 1. Keynesian economists argue that savings can actually be bad for the economy. Explain their argument. ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ 2. Classical Economists argue that saving actually leads to long-run economic growth. Explain their reasoning. ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ Concept #3: The Laffer Curve: To understand the idea behind the Laffer Curve, suppose at the current income tax rate of 10%, taxable income amounts to $500,000,000. 1. Tax Revenue = Tax Rate x Taxable income Tax revenue collected at a 10% income tax rate is ________________________________ Now, suppose the tax rate was raised to 40%, this reduced taxable income to $100,000,000 2. Tax revenue collected at a 40% income tax rate is ________________________________

3. Why would increasing the income tax rate reduce taxable income? ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________

Concept #4: The Phillips Curve: 1. What relationship does the Phillips curve represent? ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________

2. Why is it impossible to solve all three macroeconomic goals with aggregate

demand management?

______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________