question

TRUE or FALSE: Fiscal Policy refers to changing the level of government spending and taxes to achieve a greater equality in the distribution of income

answer

False

question

TRUE or FALSE: The primary objective of fiscal policy is to stabilize the size of the federal debt.

answer

False

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TRUE or FALSE: A contractionary fiscal policy is designed to decrease short-run aggregate supply

answer

False

question

An expansionary fiscal policy is designed to ___________________ aggregate ____________________

answer

Increase ....... Demand

question

Assume the economy is at its full-employment real GDP. What would most likely result if the federal government increased spending without increasing tax revenues?

answer

an increase in the price level

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During the past twelve months unemployment has been under 5 percent and the GDP price index has increased by 2%. Total production of goods and services is projected to be 5% higher in the next twelve months. What policy would be most appropriate for short-run stabilization purposes?

answer

relying on the automatic stabilizers

question

TRUE or FALSE: Non- discretionary fiscal policy refers to congress changing the tax and transfer payments programs during a recession or inflationary boom to stabilize the size of government.

answer

False

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TRUE or FALSE: Tax rates are an example of an automatic stabilizer

answer

False

question

The crowding-out effect suggests that increases in consumption are usually at the expense of saving

answer

False

question

A budget deficit arises when federal government expenditures are increasing

answer

False

question

The public debt is the accumulation of household, business, and government debt over time

answer

False

question

A significant contributor to, or cause of, the large U.S. public debt is the financing of additional gross private domestic investment by businesses.

answer

False

question

A large U.S. public debt cannot bankrupt the federal government, leaving it unable to meet its financial obligations, because the government can decrease interest rates which will increase investment spending

answer

False

question

Suppose the federal government had a budget deficit of $60 billion in year 1, a budget surplus of $20 billion in year 2, a budget deficit of $90 billion in year 3. At the end of three years the federal government's public debt would have _________________ by $ ________ billion

answer

Increase....... $130

question

What is fiscal policy?

answer

Fiscal policy refers to congress changing the levels of government spending and taxes to stabilize the economy (ex: achieve potential real GDP, the natural rate of unemployment, and price stability.)

question

What is the objective of expansionary fiscal policy?

answer

to close a recessionary gap (recession) by increasing aggregate demand

question

What is the objective of contractionary fiscal policy?

answer

to close an inflationary gap (boom) by decreasing aggregate demand

question

What is aggregate demand?

answer

A schedule or curve that shows the total quantity of goods and services that would be demanded (purchased) at various price levels

question

fiscal policy can be either _______ or ________________

answer

discretionary .... non discretionary

question

What does discretionary mean?

answer

the power or right to decide or act according to one's own judgment; freedom of judgment or choice. (synonym: judgement)

question

What is another word for discretionary fiscal policy?

answer

active fiscal policy

question

what is discretionary(active) fiscal policy?

answer

It means that congress actually meets to implement changes in government expenditures and/or taxes to close an output gap

question

What is another name for non-discretionary fiscal policy?

answer

passive or automatic fiscal policy

question

which fiscal policy actively manipulates aggregate demand?

answer

discretionary fiscal policy

question

What are some examples(causes/reasons) of a negative GDP gap or recession?

answer

1.) High unemployment ( cyclical= repeated) 2.) Actual GDP natural rate

question

What is a solution to a negative GDP gap or recession?

answer

-Increase aggregate demand -Speed up the economy to reduce high employment

question

For expansionary fiscal policy, what are some policy options for congress?

answer

1.) Increase government spending 2.) Increase investment tax credit 3.) Reduce corporate income tax rate 4.) Reduce personal income taxes 5.) Increase transfer payments 6.) Incur(get/acquire) a budget deficit

question

What does the term inflation mean?

answer

A rise in the general level of prices in an economy, an increase in an economy's price level

question

What is budget deficit?

answer

The amount by which expenditures(the action of spending funds ; an amount of money spent) exceed revenues(income/earnings: usually state or company or organization) in any year

question

What is budget surplus?

answer

The amount by which the revenues (income/earnings: usually state or company or organization) of the federal government exceed its expenditures(the action of spending funds; an amount of money spent) in any year. EXAMPLE/ EASIER DEFINITION: when a government spends more on programs than it collects.

question

multiplier effect equation

answer

- triangleGDP= m x triangle (spending)

question

Initial increase in C, Ig, and/or G causes larger ______________ in real GDP

answer

increase

question

Anticipated impact on the economy after solution for expansionary fiscal policy is.....

answer

1.) Multiplier effect: Initial increase in C, Ig, and/or G causes larger increase in real GDP 2.) Aggregate demand increases

question

What are the final results of Expansionary fiscal policy?

answer

1.) Unemployment falls 2.) Negative GDP gap closed 3.) Actual GDP= potential real GDP 4.) Unemployment rate= natural rate

question

What are some examples/causes of Positive GDP gap or economic boom?

answer

1.) Demand-pull inflation 2.) Actual GDP> potential real GDP 3.) Unemployment rate < natural rate

question

What is a solution to a positive GDP gap or economic boom?

answer

- Decrease aggregate demand - Slow down the economy to reduce demand-pull inflationary pressures

question

What is demand-pull inflation?

answer

Increases in the price level (inflation) resulting from increases in aggregate demand ; "too much spending chasing too few goods"

question

For contractionary (contract means shrink) fiscal policy, what are some policy options for congress?

answer

1.) Reduce government spending 2.) Reduce investment tax credit 3.) Increase corporate income tax rate 4.) Increase personal income taxes 5.) Decrease transfer payments 6.) Incur a budget surplus

question

Anticipated impact on the economy after solution for contractionary fiscal policy is.....

answer

1.) Multiplier effect: Initial decrease in C, Ig, and/or G causes larger decrease in real GDP 2.) Aggregate demand decreases

question

What are the final results of Contractionary fiscal policy?

answer

1.) Demand-pull inflationary pressures fall 2.) Positive GDP gap closed 3.) Actual GDP= potential real GDP 4.) Unemployment rate= natural rate

question

Level of taxes INCREASE in the level of taxes on real GDP: if TX increase, Income __________, C decreases (S decreases), and GDP ___________

answer

decreases ..... decreases

question

Level of taxes INCREASE in the level of taxes on real GDP: If taxes increase by $x, then disposable income ______________ by $x

answer

decreases

question

Level of taxes INCREASE in the level of taxes on real GDP: If disposable income decreases by $x, then C and S ______________

answer

decrease

question

Level of taxes INCREASE in the level of taxes on real GDP: To find by how much C decreases what formula should be used?

answer

MPC x triangle Disposable income = triangle C

question

Level of taxes INCREASE in the level of taxes on real GDP: If C decreases , then real GDP ____________

answer

decreases

question

Level of taxes INCREASE in the level of taxes on real GDP: To find by how much GDP decreases, what formula should be used?

answer

triangle real GDP = multiplier x triangle C

question

Level of taxes DECREASE in the level of taxes on real GDP: If TX decrease, Income __________, C increases (S increases ) , and GDP __________

answer

increases ..... increases

question

Level of taxes DECREASE in the level of taxes on real GDP: If taxes decrease by $x, then disposable income ________ by $x

answer

increases

question

Level of taxes DECREASE in the level of taxes on real GDP: If disposable income increases by $x, then C and S _____________

answer

increase

question

To find by how much C increases, what formula should be used?

answer

MPC x triangle disposable income = triangle C

question

If C increases , then real GDP _____________

answer

increases

question

To find by how much GDP increases, what formula should be used?

answer

triangle real GDP = multiplier x triangle C

question

What does C mean in the formulas?

answer

consumer spending

question

What does G mean in the formulas ?

answer

Government spending

question

A $10 billion increase in government spending will ____________ real GDP

answer

increase

question

A $10 billion increase in taxes will ___________ GDP

answer

decrease

question

To find out an increase in government spending in regards to GDP, what equation should be used?

answer

triangle real GDP = multiplier x triangle G

question

Non- discretionary fiscal policy (automatic stabilizers, built-in stability) passively _____________ aggregate demand

answer

manipulates

question

Certain government programs, once they are in place, will _____________ stabilize the economy

answer

automatically

question

A built-in stabilizer is anything that :

answer

1.) Increases the government's budget deficit (or reduces its budget surplus) during a recession both of which are expansionary 2.) Increases the government's budget surplus (or reduces its budget deficit) during an expansion both of which are contractionary

question

What are some examples of automatic stabilizers?

answer

1.) Personal income tax, corporate income tax, sales tax, payroll tax revenues 2.) Unemployment compensation 3.) Welfare payments

question

Non discretionary policy automatically moves the federal budget towards a _________ during a recession

answer

deficit ( speed up economy )

question

Non discretionary policy automatically moves the federal budget towards a ____________ during a period of demand-pull inflation (boom)

answer

surplus

question

What are the advantages of the automatic stabilizers?

answer

1.) The automatic stabilizers are "built-in" to federal government programs, therefore the dollar amounts change with no explicit action taken by congress 2.) The automatic stabilizers do not suffer from some of the timing problems of discretionary fiscal policy. No recognition lag and no administrative lag. 3.) The automatic stabilizers lessen the possibility of another Great Depression

question

The more progressive the tax system ( higher marginal tax rates ) the more _________ the economy

answer

stable

question

The more progressive(growing,continuous) the tax system ( higher marginal tax rates= more taxing ) the more stable the economy because

answer

1.) The greater the economy's built-in stability A. Net tax line is steeper because of higher marginal tax brackets B. Larger cyclical deficits and surpluses 2.) The greater the economy's stability with respect to changes in the MPC A. After-tax consumption function is flatter because of higher marginal taxes B. MPC becomes smaller, thus the multiplier becomes smaller

question

What is disposable income?

answer

income after taxes and transfers

question

What is MPC?

answer

Marginal Propensity to Consume. - The fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income.

question

What is a multiplier?

answer

change in real GDP/ Initial change in spending

question

The less progressive the tax system (lower marginal tax brackets = less taxing) the _______ stable the economy

answer

less

question

Cyclically adjusted budget: what does it do?

answer

Adjusts the actual federal budget deficit ( or surplus) for non-discretionary outcomes

question

Cyclically adjusted budget: For a given T and G, a cyclical deficit automatically occurs as the economy enters a ___________

answer

recession

question

Cyclically adjusted budget removes the deficit that is simply a by-product of the recession to determine the ____________, ___________, __________, or ___________

answer

government's overall policy, expansionary, contractionary, or neutral

question

Cyclically adjusted budget: If T shifts down and/or G shifts up (discretionary), then fiscal policy is

answer

expansionary

question

Cyclically adjusted budget: If T shifts up and/or G shifts down (discretionary) , then fiscal policy is

answer

contractionary

question

What are the reasons why fiscal policy may destabilize the economy?

answer

A.) Problems of timing B.) Problem of the political business cycle C.) Future policy reversals D.) Problems with state and local government fiscal policies offsetting federal fiscal policy E.) Problem of the crowding-out effect F.) Problems with implementing fiscal policy in an open economy (foreign sector)

question

What is budget deficit? (G>Tx)

answer

Amount by which government expenditures exceed tax collections in a given year

question

What does Tx stand for ?

answer

taxes

question

What is budget surplus? (G < Tx)

answer

Amount by which tax collections exceed government expenditures in a given year

question

What is public (national) debt

answer

Accumulation of federal budget deficits and surpluses over time

question

The public debt consists of :

answer

-Treasury bills -Treasury notes -Treasury bonds -U.S. savings bonds

question

When the federal government runs a budget deficit, it makes up the difference by ..

answer

having the department of the Treasury issue new U.S. Treasury securities

question

If the federal government incurs a budget deficit, then the U.S. public debt will _________

answer

increase

question

If the federal government incurs a budget surplus, then the U.S. public debt will ___________

answer

decrease

question

If the federal government has a balanced budget, then the U.S. public debt will ___________

answer

no change

question

What are the sources or causes of budget deficits and thus a large public debt

answer

1.) Wars 2.) Recessions 3.) Lack of fiscal discipline by congress ( spend, spend, spend brings in the congressional votes. Also, tax cuts (popular with the voters) without offsetting cuts in government spending

question

Will large public debt bankrupt the federal government?

answer

no

question

Federal government can meet its financial obligations if there's a large public debt by:

answer

1.) Refinancing maturing Treasury securities 2.) Increasing taxes 3.) Creating money (through the federal reserve in a national emergency)

question

Is the public debt a burden on future generations? Explain.

answer

1.) The public debt is a liability to Americans as taxpayers and an asset(strength) to the owners of the government securities 2.) If the entire public debt is held internally by Americans , the liability would exactly offset the asset, or we would "owe it to ourselves" 3.) If the public debt is owned by foreigners, then the externally-held debt may have a negative impact on the U.S. economy

question

Will the public debt increase income inequality? (Yes)

answer

Yes, if assuming that: 1.) Ownership of the public debt is concentrated among wealthier groups 2.) If most people pay income taxes and since the overall federal tax system is slightly progressive, payment of interest on the public debt slightly increases income inequality

question

Will the public debt increase income inequality? (No)

answer

No, if assuming that : 1.) Ownership of the public debt is concentrated among wealthier groups 2.) Payment of income taxes is concentrated among wealthier groups

question

What is the crowding-out effect ?

answer

A rise in interest rates and a resulting decrease in planned investment caused by the federal government's increased borrowing to finance budget deficits and refinance debt.

question

What is the crowding-out effect and why it affects the fiscal policy in terms of destabilizing the economy ?

answer

An expansionary fiscal policy designed to increase aggregate demand will increase the budget deficit. If the deficit is financed by an increase in government borrowing, interest rates will increase causing private-sector investment spending (Ig) to fall. The "crowding out" of investment reduces aggregate demand and,thus, weakens the impact of the expansionary fiscal policy

question

What does Ig stand for?

answer

private-sector investment spending

Macroeconomics Chapter 13 (Unit 3) – Flashcards

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