ECO/372 – Public Finance, and Aggregate Supply and Demand

The surplus and/or deficit is a _____ because we measure the surplus or deficit at each fiscal year. National debt is a _____, showing how much the government owes at a particular point in time. flow, stock
The total level or amount of something at a particular point in time stock
the change to the stock of that something over a period of time flow
at the state government level, the main sources of income are: state individual and corporate income taxes.sales and excise taxes.
Revenue sources are different for federal, state, and local governments
Federal income taxes are progressive The more you earn the higher your tax rate, all things equal
Three types of taxes proportional, progressive, regressive
regressive tax A tax for which the percentage of income paid in taxes decreases as income increases
progressive tax A tax for which the percentage of income paid in taxes increases as income increases
proportional tax A tax in which the average tax rate is the same at all income levels.
The function of firms in the circular flow model is to _____ resources and _____ products. purchase, sell
circular flow model A model that concisely describes how goods, services, resource, and money flow back and forth in an economy
net taxes the difference between the taxes collected by the government from firms and households and the transfer payments and subsidies the government makes to them.
tax a payment made to the government that is the result of economic activity. taxes are generally collected from both individuals and businesses
transfer payment a payment made by the government that does not require an exchange of economic activity in return. transfer payments often take the form of payments to households
subsidy a payment made by the government that does not necessarily require an exchange of economic activity in return. subsidies most often take the form of payments to businesses
in the circular flow model, households sell resources to and buy products from ____ firms
households and firms receive public goods and services in exchange for the _____ taxes they pay net
monetary payments, in the form of net ____, flow to the government from households and businesses taxes
at the federal government level, the main source of income are: social insurance and retirement receiptspayroll taxes
which of the following is not an area of most federal spending education
more often than not, the federal government spends _____ than it receives in revenue, forcing it to borrow to finance its deficits. more
State sources of revenue vary widely true
the type of tax that is assessed is determined by using the average tax rate
the federal government finances its deficits via borrowings
most economists prefer measuring the deficit relative to GDP because it allows a comparison across countries.it allows a comparison across time.
when the government needs to borrow money, it _____ the demand for loanable funds in the economy. increases
if the demand for loanable funds increases, interest rates _____ which can have big effects on consumers increases
generally, the budge deficit is calculated and reported _____, and the national _____ is the accumulation of previous budget deficits and surpluses yearly, debt
the national _____ is the accumulation of deficits and surpluses over time debt
___ demand can be interpreted as the overall demand for real GDP from four different sources aggregate
Aggregate Demand A downward-sloping curve showing the relationship between the price level and the quantity of domestically produced goods and services all households, business firms, governments, and foreigners (net exports) are willing to purchase.
aggregate supply illustrates how the total amount of goods and services produced in an economy relates to the _____ level price
if the amount of output firms are willing to produce at each possible price level increases, that’s: a shift of the aggregate supply
indicate the likely effect of a wide-reaching increase in wages paid to workers on the AD-AS model aggregate supply decreases
the aggregate supply curve slopes _____ in the short run because input prices are sticky and take time to adjust
according to the real-balances effect, when the price level rises, the real value of saving _____, and people are less willing to buy goods and services, so _____ falls, and the quantity of real GDP demanded _____, resulting in a _____-ward sloping aggregate demand curve. falls,consumption,decreases,down
according to the interest rate effect, when the price level _____, people need more money to make the same number of purchases, so the demand for money _____. As a result, interest rates increase which lowers consumption and investment causing the quantity of real _____ demanded to _____. rises,rises,GDP,decrease
according to the foreign purchase effect, if prices in the United States rise and prices in other countries remain stable, without a corresponding adjustment in exchange rates: US consumers will buy more foreign goods and services, and imports will rise, foreigners will buy fewer goods and services produced in the United States, and exports will fall. The quantity of net exports will fall, reducing the quantity of real GDP demanded, resulting in a downward sloping aggregate demand curve.
one of the challenges of using government expenditures to stimulate the economy is that: eventually the spending must return to their previous levels which may adversely affect aggregate demand in the economy.
which of the following will cause government purchases to fall? decreased spending on airportsdecreased spending on defensedecreased spending on highways
which of the following will cause government purchases to rise? increased spending on airportsincreased spending on defenseincreased spending on highways
demand and aggregate demand We use demand to talk about the price and quantity of a single good or service produced in a specific market.We use aggregate demand to describe the overall, or total, demand for all final goods and services produced in an economy
Changes in government purchases and net exports directly affect the aggregate demand for real _____ GDP
aggregate demand can be interpreted as the overall demand for real GDP, Y, from four different sources: government purchases; gross investment; net exports; consumption
_____ from the US will tend to rise when foreign incomes increase. exportswhen foreign consumers have more (less) money, they tend to increase (decrease) spending on goods from ALL sources – including US markets
exchange rate the rate, or price, at which one currency can be exchanged for another
appreciation (of currency) an increase in the value, or price, of one currency relative to another
depreciation (of currency) a decrease in the value, or price, of one currency relative to another
consumption (C) all expenditures made by households on goods and service, like clothing, food, electronics, and recreation, during a given time period.
aggregate demand (AD) a schedule or curve that represents the relationship between the quantity of real GDP demanded in the economy and the price level, all else held constant
gross investment (I) The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a given time period. Gross investment is classified into three categories: business fixed investment, residential investment, and inventory investment. Sometimes referred to simply as investment.
increase of aggregate demand an increase in the quantity of real GDP demanded in the economy at every price level; graphically, an increase in aggregate demand is represented by a rightward shift of the aggregate demand curve
decrease in aggregate demand a decrease in the quantity of real GDP demanded in the economy at every price level; graphically, a decrease in aggregate demand is represented by a leftward shift of the aggregate demand curve
government purchases (G) all final goods purchased by federal, state, and local governments – such as tanks, police cars, fire engines, and office supplies – during a given time period, as well as all final services purchased from labor resources – such as airport security personnel, police officers, and teachers.
next exports (NX) the difference between exports (goods made domestically and purchased by foreign consumers) and imports (goods made in other countries and purchased domestically). Net exports equals exports minus imports (NX = X – M)
when we draw an aggregate demand curve, we’re assuming that the only thing that is changing as we move up and down the curve is: the overall price level
the relationship between the price level and the amount of real GDP supplied in the economy is called aggregate supplyshort-run aggregate supply
if consumers ____ the amount of goods and services they purchase, given constant prices, then aggregate ____ for real GDP increases increasedemand
if consumers ____ the amount of goods and services they purchase, given constant prices, then aggregate ____ shifts to the right, since goods and services are being purchased at every _____ level. increasedemandprice
According to the real balances effect, when the price level rises, the real value of savings: falls, consumption falls, the quantity of real GDP demanded decreases, resulting in a downward sloping aggregate demand curve
assume that an economy is initially in equilibrium, and is operating at point ‘D’ along the aggregate demand curve. if the level of investment rises, the economy will move towards point ‘B’
aggregate demand illustrates a(n) _____ relationship between the price level and the quantity of real GDP, or output, demanded. negative
a movement along the AD curve is due to changes in the price level
in the short run, a significant increase in saving may actually have harmful effects on the economy
if consumption or gross investment increase for any reason other than the price level, that’s a: shift of the aggregate demand
savings is important for long-run growth: when households save, that money is available for: firms to borrow for investment; that borrowing leads to more capital and higher production in the future
in consumers increase the amount of spending, aggregate demand shifts to the _____.
a movement along the AD curve is due to_____ changes in the price level
a shift in the aggregate demand (AD) curve is due to changes in the determinants of aggregate demand
which of the following will cause consumption to rise? lower personal taxes, rising wealth, increased borrowing
your state raises taxes on income, while holding fixed all other forms of taxation. this causes to , so that aggregate demand shifting to the
many people, excited by recent economic growth begin to relax, increasing spending and saving less this causes to , so that aggregate demand shifting to the
after reading reports of increased consumer confidence in the economy, firms anticipate higher expected returns on investments in the future this causes to , so that aggregate demand shifting to the
the explosion of robotics and remote applications causes firms in the economy to purchase new devices and software this causes to , so that aggregate demand shifting to the
interest rates in the economy decrease this causes to , so that aggregate demand shifting to the
a stock market boom dramatically increases the amount of wealth in the economy this causes to , so that aggregate demand shifting to the
existing home prices in the economy start to decline this causes to , so that aggregate demand shifting to the
this causes to , so that aggregate demand shifting to the
Real GDP Expenditures Real GDP (Y) = Consumption (C) + Gross Investment (I) + Government Purchases (G) + Net Exports (NX)Y = C + I + G + NX
Net Exports (NX) Net Exports = Exports – ImportsNX = X – M
Aggregate demand is _____ sloping (one word). downward
Which of the following statements is true? we use demand to talk about the price and quantity of a single good or service produced in a specific marketwe use aggregate demand to describe the overall, or total, demand for all final goods and services produced in an economy.
inflation is caused by expansions – an increase in AD can cause inflationrecessions – a decrease in AS can cause inflation
changing one of the determinants of aggregate supply will cause the aggregate supply curve to shift
generally, changes to social institutions that inhibit production decrease aggregate supply
the long-run aggregate supply curve is a vertical line originating at the full-employment level of real GDP because all input prices are flexible in the long run.
a ___ shock causes aggregate demand or supply to fall. at every price level negative
positive shocks or changes to aggregate supply include an abrupt decrease in oil pricesan unexpected increase in productivity
aggregate ____ illustrates how the total amount of goods and services produced in an economy relates to the price level supply
sticky wages the idea that nominal wages tend to adjust slowly (be sticky) in response to changes in the market.are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages
aggregate supply (AS) A schedule or curve that represents the relationship between the quantity of real GDP supplied in the economy and the price level.Also called short-run aggregate supply.The relationship between the price level and the quantity of goods and services supplied in an economy. AS curve looks different in the long run and short run. In the long run, it is a vertical line, as output is dictated by the factors of production alone. In the short run, it is upward sloping.
aggregate supply illustrates the relationship between the price level and the amount of real GDP supplied in the economy
in the short run when wages are fixed, output (GDP) will expand if the price level increases because profit margins increase and increasing production is profitable
the supply curve for an individual good or service is upward-sloping because: marginal costs are increasingthis explains why an individual supply curve is upsloping
Which of the following transactions best represents the government playing the role of provider of a good or service? The state government pays for police to patrol the state and federal roadways.
Which of the following transactions best represents the government making a transfer payment to a household or business? The federal government’s Supplemental Nutritional Assistance Program assists low-income families with purchasing food.
A public debt that is owed to foreigners can be burdensome because the payment of interest reduces the volume of goods and services available for domestic uses.
Many states in the U.S. acquire significant amounts of funds from the following, except property taxes
Which of the following is not a significant source of revenue for the U.S. federal government? Property taxes
Which of the following is the largest expenditure item of state governments? Education
Public finance is the subdiscipline of economics that studies the various ways in which governments raise and expend money.
Which one of the following is not an excise tax of the federal government? General sales tax
Which is the most important source of tax revenue for local governments? Property taxes
The Social Security tax is regressive because no Social Security tax is collected for incomes in excess of a “cap” income level.
A federal budget deficit exists when federal government spending exceeds tax revenues in a given year.
Which of the following is not a government activity that is involved in public finance? Regulating the activities of firms in the financial sector of the economy.
To track the public debt over time and understand its significance to the economy, it is best measured relative to the gross domestic product.
One important reason why the United States government is not likely to go bankrupt even with a large public debt is that it has the power to print money to finance the debt.
Which of the following is the largest expenditure item of local governments? Education
How is the public debt calculated? By summing the annual difference between tax revenues and government spending over the years
A budget surplus means that Government revenues are greater than expenditures in a given year
Which of the following statements about payroll taxes is false? They are lump-sum taxes not based on wages/salaries.
A tax is regressive if it Takes a smaller percentage of income as income increases
The largest proportion of the U.S. public debt is held by the U.S. public (individuals, businesses, financial institutions, and government).
a. In the short run, when the price level increases, the quantity of real GDP supplied will increase and the aggregate supply curve will not shift . b. In the short run, some input prices are said to be sticky. This means that: some input prices will remain constant even as the price level changes.
a. There is an unexpected decrease in oil prices. This causes: an increase in aggregate supply, shifting the aggregate supply curve to the right. Correct b. The government increases the amount that all producers are required to contribute to health insurance coverage. This causes: a decrease in aggregate supply, shifting the aggregate supply curve to the left. Correct
a. Point B is referred to as a trough . b. The movement from point A to point E is called a business cycle . c. Point D is referred to as a peak . d. The movement from point B to point D is called an expansion .
a. As a result of an increase in the price level, the cost of borrowing increases, which causes people to buy fewer cars. Interest-rate effect b. When the price level decreases, restaurants become busier as more people purchase restaurant meals. Real-balances effect
All European countries experience an economic expansion, raising incomes in each of the European countries. This causes:an increase in aggregate demand, shifting the aggregate demand curve to the right. Correct The government decides to decrease the amount it spends on the military. This causes:a decrease in aggregate demand, shifting the aggregate demand curve to the left. Correct
Aggregate demand is best described as the relationship between the: quantity of real GDP demanded in the economy and the price level.
The short-run equilibrium for this economy is at point g
The intersection of the aggregate demand and aggregate supply curves determines the _____. equilibrium level of real domestic output and prices
If aggregate supply shifts from AS1 to AS2, then the price level will _____. increase and real domestic output will decrease
If the price level increases from 150 to 250, the real output demanded will _____. decrease by $200 billion
An economy is in both short- and long-run equilibrium at point C only
If current output is Q1 and full-employment output is Q2, then in the long run the short aggregate supply schedule is _____. AS2
If current output is Q1 and full-employment output is Q3, then in the long run the short aggregate supply schedule is _____. AS3
The foreign purchases, interest rate, and real-balances effects explain why the aggregate demand curve is downward-sloping
A decrease in expected returns on investment will most likely shift the AD curve to the _____. left because Ig will decrease
Which would most likely increase aggregate supply? An increase in productivity
An increase in personal income taxes will cause a(n) decrease (or shift left) in aggregate demand
The economy’s long-run aggregate supply curve is vertical
An expected increase in the prices of consumer goods in the near future will _____. increase (or shift right) in aggregate demand now
A decrease in labor costs will cause aggregate _____. supply to increase
If at a particular price level, real output from producers is greater than real output desired by purchasers, then there will be a general _____. surplus and the price level will fall
If AD1 shifts to AD2, then the equilibrium output increases from _____. Q1 to Q2 while the price level rises from P1 to P2
Which of the following would not shift the aggregate demand curve? Productivity rates
In the diagram, the economy’s short-run AS curve is line _____ and its long-run AS curve is line _____. 2; 1
The short-run version of aggregate supply assumes that product prices are flexible while resource prices are fixed
In the aggregate demand-aggregate supply model, the economy’s price level is assumed to be variable, unlike in the aggregate expenditures model
The labels for the axes of the aggregate demand graph should be _____. real domestic output on the horizontal axis and the price level on the vertical axis
The aggregate supply curve (short run) _____. slopes upward and to the right
A decrease in government spending will cause a(n) decrease in aggregate demand
An increase in expected future income will _____. increase aggregate demand
Social Security contributions are part of payroll taxes.
The circular flow model with government included would show that government provides goods and services to businesses and households and pays for them with net taxes.
Most economists believe that property taxes are regressive.
The long-run aggregate supply curve is vertical because: all input prices are flexible in the long run.
In order to reduce the deficit, the government decides to increase the level of taxes in the economy. This causes: a decrease in aggregate demand, shifting the aggregate demand curve to the left. Correct
he economy experiences a sustained expansion in stock prices for the majority of companies in the country. This causes: an increase in aggregate demand, shifting the aggregate demand curve to the right. Correct
A shift from AD2 shifts to AD1 would be consistent with what economic event in U.S. history? Great Recession of 2007-2009
Which of the following factors does NOT explain a movement along the AD curve? The expenditure multiplier effect
An increase in expected future income will increase aggregate demand
The long-run aggregate supply curve is vertical
The labels for the axes of an aggregate supply curve should be real domestic output for the horizontal axis and price level for the vertical axis
An expected increase in the prices of consumer goods in the near future will increase (or shift right) in aggregate demand now
The economy’s long-run AS curve assumes that wages and other resource prices eventually rise and fall to match upward or downward changes in the price level
If AD1 shifts to AD2, then the equilibrium output increases from 1 to Q2 while the price level rises from P1 to P2
An aggregate supply curve represents the relationship between the price level and the production of real domestic output
Which of the following factors does not explain the inverse relationship between the price level and the total demand for output A substitution effect
Which would most likely shift the aggregate supply curve? A change in the prices of resources
When the price level decreases, the demand for money falls and the interest rate falls
Which of the following events would most likely reduce aggregate demand An increase in real interest rates.
If current output is Q1 and full-employment output is Q3, then in the long run the short aggregate supply schedule is AS3
The two largest sources of tax revenue for the U.S. federal government are personal income taxes and payroll taxes.
Which of the following descriptions is most representative of the mix of revenues and expenditures of a local government Revenue is predominantly from property taxes but may include sales taxes or income taxes. Expenditures include investments in education and public welfare.
In the diagram, the economy’s relevant aggregate demand and long-run aggregate supply curves, respectively, are lines 4 and 1
The aggregate demand curve or schedule shows the relationship between the total demand for output and the price level
proportional tax

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