ECON 1000 - CHAPTER 8 QUESTIONS AND VERIFIED
ANSWERS |100% CORRECT | ALREADY GRADED A
stabilization function Correct Answers attempts by government to
minimize fluctuations in overall macroeconomic activity.
Fiscal Policy Correct Answers Government policies related to spending
and revenue generation.
Monetary Policy Correct Answers Government policies which
determine a nation's Money Supply.
"The General Theory of Employment, Interest and Money" (1936) by
John Maynard Keynes Correct Answers a book, written against the
backdrop of the Great Depression, which was in many ways an assault
on "traditional macroeconomic thought" (previous argument was for
direct control of the macroeconomy)
central argument of "The General Theory...": markets are volatile and
might not result in "full employment"
observed outcomes during Great Depression:
- people don't have jobs/incomes
-without income people don't buy output from firms
-firms can't make profits, so they shutdown and layoff workers
-stable state with low resource use and low output
low output equilibria caused by too little spending => recall, from our
discussion of GDP that: Y = C + I + G + NX => a low value of C can
, bring down Y Correct Answers -solution: replace missing private
spending with government spending (i.e., offset the low value of C with
a higher value of G ) => deficit spending as an economic stimulus
during downturns [a budget deficit occurs when government spending
exceeds revenues]
-corollary: government should cut back spending and run a surplus
during an expansion (this has often been overlooked) [a budget surplus
occurs when government revenues exceed spending]
- Key implication: Fiscal Policy can indirectly stabilize macroeconomic
activity ("spending against the wind")
Expansionary Fiscal Policy Correct Answers increases in government
spending or decreases in taxes with the aim of stimulating overall
economic activity
Contractionary Fiscal Policy Correct Answers decreases in government
spending or increases in taxes with the aim of dampening overall
economic activity
Crowding Out Correct Answers decreases in private spending that occur
following increases in government spending
as G is increased, does C remain constant or decrease? => a decrease in
C reveals "crowding out"
If a significant amount of crowding out occurs, then the effectiveness of
commercial bank is only required to retain a portion of the money it has
accepted as create any new economic activity, but rather replaces
private economic activity with government economic activity (in a
likely inefficient way)
ANSWERS |100% CORRECT | ALREADY GRADED A
stabilization function Correct Answers attempts by government to
minimize fluctuations in overall macroeconomic activity.
Fiscal Policy Correct Answers Government policies related to spending
and revenue generation.
Monetary Policy Correct Answers Government policies which
determine a nation's Money Supply.
"The General Theory of Employment, Interest and Money" (1936) by
John Maynard Keynes Correct Answers a book, written against the
backdrop of the Great Depression, which was in many ways an assault
on "traditional macroeconomic thought" (previous argument was for
direct control of the macroeconomy)
central argument of "The General Theory...": markets are volatile and
might not result in "full employment"
observed outcomes during Great Depression:
- people don't have jobs/incomes
-without income people don't buy output from firms
-firms can't make profits, so they shutdown and layoff workers
-stable state with low resource use and low output
low output equilibria caused by too little spending => recall, from our
discussion of GDP that: Y = C + I + G + NX => a low value of C can
, bring down Y Correct Answers -solution: replace missing private
spending with government spending (i.e., offset the low value of C with
a higher value of G ) => deficit spending as an economic stimulus
during downturns [a budget deficit occurs when government spending
exceeds revenues]
-corollary: government should cut back spending and run a surplus
during an expansion (this has often been overlooked) [a budget surplus
occurs when government revenues exceed spending]
- Key implication: Fiscal Policy can indirectly stabilize macroeconomic
activity ("spending against the wind")
Expansionary Fiscal Policy Correct Answers increases in government
spending or decreases in taxes with the aim of stimulating overall
economic activity
Contractionary Fiscal Policy Correct Answers decreases in government
spending or increases in taxes with the aim of dampening overall
economic activity
Crowding Out Correct Answers decreases in private spending that occur
following increases in government spending
as G is increased, does C remain constant or decrease? => a decrease in
C reveals "crowding out"
If a significant amount of crowding out occurs, then the effectiveness of
commercial bank is only required to retain a portion of the money it has
accepted as create any new economic activity, but rather replaces
private economic activity with government economic activity (in a
likely inefficient way)
