Econ Ch 13 – Flashcards
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The government's fiscal policy options for ending severe demand-pull inflation include
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reducing government spending, increasing taxes, or both.
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For a person who wants to preserve the size of government, the fiscal options for ending severe demand-pull inflation would include
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an increase in taxes.
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For a person who thinks the public sector is too large, the fiscal options for ending severe demand-pull inflation would include
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a cut in government spending.
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The ratchet effect makes anti-inflationary policy
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more difficult
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Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession.
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Net tax revenue falls and transfer payments rise. Balancing the budget would require lowering transfer payments and raising taxes
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Built-in, or automatic, stabilizers work by changing ______ so that GDP changes are reduced.
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taxes and government payouts
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What type of tax system would have the most built-in stability?
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A progressive tax because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes.
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The standardized budget measures what the Federal deficit or surplus would be if the economy reached the _______ level of GDP.
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full-employment
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If the standardized budget is balanced, the
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government is not engaging in either expansionary or contractionary policy
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A political business cycle is the concept that
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politicians are more interested in reelection than in stabilizing the economy
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Expectations of a near-term policy reversal weaken fiscal policy because
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consumers may hesitate to increase their spending because they believe that tax rates will rise again.
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The crowding-out effect is the
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reduction in investment spending caused by the increase in interest rates, arising from an increase in government spending.
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Consider the following statement: "Although fiscal policy clearly is useful in combating the extremes of severe recession and demand-pull inflation, it is impossible to use fiscal policy to fine-tune the economy to the full-employment, noninflationary level of real GDP and keep the economy there indefinitely." This statement recognizes that
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the impact of fiscal policy will affect the economy differently depending on the timing of the policy and the severity of the situation
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What are the two ways to measure the public debt?
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Its absolute dollar size and as a percentage of GDP
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The distinction between the absolute and relative sizes of the public debt is important because
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the absolute size doesn't tell you about an economy's capacity to repay the debt
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Refinancing the public debt means
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selling new bonds to retire maturing bonds.
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An internally held debt is one in which the
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bondholders live in the nation having the debt
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Paying off an internally held debt would
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not burden the economy as a whole
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Paying off an externally held debt
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may lower the dollar exchange rate.
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The total public debt is more relevant to an economy than the public debt as a percentage of GDP
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F
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An internally held public debt is like a debt of the left hand owed to the right hand
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T
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The Federal Reserve and Federal government agencies hold more than three-fourths of the public debt
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F
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The portion of the U.S. debt held by the public (and not by government entities) was larger as a percentage of GDP in 2009 than it was in 2000
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T
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As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced industrial nations
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F
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Refinancing of the public debt might drive up real interest rates because
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government borrowing to finance the debt increases demand for funds and competes with private borrowing
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Refinancing of the public debt might cause
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higher interest rates that can lower investment and economic growth.
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Social Security and Medicare are "pay-as-you-go" plans. This means that
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most of the current revenues from the Social Security tax are paid to current Social Security retirees
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Social Security and Medicare trust funds are
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assets held by these programs to help pay for future projected tax revenue shortfalls
