ECON 151

Prepare: Chapter 16
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Section:

In order to get full credit, answer all questions in either bold font or red font.
Read Chapter 16 in the Hubbard/O’Brien text.

1. What is fiscal policy? Define automatic stabilizers.

2. What does the government spend its money on? What is the biggest category? What is the smallest?

3. In the “Apply the Concept” section called “Is Spending on Social Security & Medicare a Fiscal Time
Bomb?” what does a “pay-as-you-go” system mean? In 1940, how many workers were there per
retiree (beneficiary)? Currently, how many workers are there per retiree?

4. Distinguish between the Medicare program and the Medicaid program.

5. What is expansionary fiscal policy? Using the AD/AS dynamic model, what is the impact on real
GDP, the unemployment rate, and the inflation rate?

6. What is contractionary fiscal policy? Using the AD/AS dynamic model, what is the impact on real
GDP, the unemployment rate, and the inflation rate?

7. What is a government purchases multiplier? What is the tax multiplier? What is the multiplier effect?

8. What is a budget deficit? A budget surplus?

9. What are the two reasons that budget deficits occur automatically during recessions?

10. Why would it be a bad idea to keep the budget balanced during a recession?