Economics-Unit 5 TEST – Flashcards
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deliberate changes in govt. spending and tax collections to achieve full employment, control inflation, and encourage economic growth
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fiscal policy
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fiscal policy is given strength by
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Employment act of 1946
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fiscal policy is enacted by the executive branch and influenced by... who report to the president
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Council of Economic Advisers
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fiscal policy is... meaning it only occurs because of fed. govt. action
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active and discretionary
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this is enacted during a recession to stimulate investment and consumption
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expansionary fiscal policy
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expansionary fiscal policy may involves.. and may lead to...
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INCREASE in govt. spending and may lead to a budget deficit because they are spending more than they are making.
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Demand and consumption can also be stimulated by
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DECREASE in taxes, to leave firms with more DI
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when demand pull inflation gets too high the govt. often enacts...
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Contractionary fiscal policy
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during contractionary fiscal policy they limit the money in the economy by...
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DECREASE in govt. spending. INCREASE in taxes (DECREASE MPC, C, and I)
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when govt needs to engage in expansionary fiscal policy it can...
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either borrow money or make new money (borrows money by selling bonds or making loans)
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when govt. borrows money or makes new money, it can sometimes lead to...
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crowding out effect
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a more expansionary way for the govt. to finance a deficit would be to...
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create more money (QUICK AND DIRTY-inflationary)
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When there is a surplus (govt has more money than intends to spend) they can either...
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1. retires its debt (by buying back bonds) 2. impoundment (govt holds onto $-very anti inflationary)
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whats the difference between liberal and conservative views?
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liberals- govt. should have larger role, support increase govt. spending during recession, and higher taxes during a BOOM conservatives- govt should have smaller role. tax cuts during recessions and govt cuts in spending during BOOM
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progressive
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taxes wealthier people at greater rates. direct relationship between level of income and level of taxations
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proportional
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flat taxes tax everyone at the same rate
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regressive
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tax wealthier people at less rates. negative relationship between income and tax burden. place a greater burden on the poor
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net taxes
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INCREASE GDP= INCREASE net taxes
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uses this during full employment to compare actual G & T. reveals what will happen in the event of changes in GDP if no discretionary fiscal actions are taken
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full employment budget
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in the short run a change in price level means...
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shift ALONG the AS curve
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in the long run a change in price level means...
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shift in the WHOLE curve
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relationship b/w inflation and unemployment with phillips curve
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1. inflation, workers want MORE money, firms profits go DOWN 2. firms RAISE wages, and LAYS OFF workers, INCREASING unemployment 3. prices have risen only BRIEFLY ahead of wages and decrease when unemployment INCREASES. then ALL goes back to equilibrium
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1.focuses on supply rather than demand as prime determinant of inflations, unemployment, and economic growth 2. focus on marginal tax rates 3. argue that taxes are TOO high and reduce incentives to work (lowering GDP) 4. support tax cuts to boost production
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supply side economists
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reveals the theoretical relationship between tax rates and max. tax revenue KNOW GRAPH
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Laffer curve
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attempts to alter AD and affect AS
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supply side fiscal policy
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supply side fiscal policyy argues that a DECREASE in taxes will increase AD and AS minimizing inflation due to:
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DECREASE taxes=INCREASE consumption and consumer spending, and capital DECREASE taxes=INCREASE employment and production DECREASE taxes=INCREASE risk taking, investment on new technology, and production
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goal of supply side economics
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INCREASE AS, decreases prices, which decreases inflation -which can also lead to decrease in unemployment LEFTWARD SHIFT IN PHILLIPS CURVE
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does G-T stabilizer really work?
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-depends on whether T is progressive, proportionally, or regressive
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a progressive tax has a.... that rises with GDP (T/GDP) and has the steepest T-Line
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average tax rate
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a proportional tax is considered a regressive tax when...
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compared to a progressive tax
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progressive tax has the...
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greatest built in stability
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for the best effect, changes in fiscal policy must occur...
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quickly, but it slowed by several factors
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takes a long time to realize there is a problem. you dont know you were at the peak until youre sliding down the other side.
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Recognition lag
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even when a problem is known, it takes a while to agree or what to do about it.
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administrative lag
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even when a decision is agreed upon, successful implementation often takes time. ex) income taxes only collected once a year, meaning a change in income tax brackets
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operational lag
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can limit the effectiveness of fiscal policies.
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the net export effect
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expansionary fiscal policy leads to
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higher interest rate due to crowding out effect, and higher interest rates lead to dollar APPRECIATION
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contractionary fiscal policy leads to
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lower interest rates due to lower AD -which lead to decreased foreign demand for the dollar,making it depreciate, and net exports INCREASE
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until great depression this was the goal of govt. finance.
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annually balanced budget
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trying to balance a govt. budget every year intensifies problems by...
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intensifying the business cycle
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counteracts the business cycle
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cyclically balanced budget
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booms and bust are NOT...
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not of equal magnitude or duration and may be unpredictable
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balancing the fed budget is difficult so the main goal is to...
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Balance the economy
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govt deficits and surpluses are considered...
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secondary to a healthy national economy
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when we see that the govt is 17 trillion in debt, we often have misconceptions..especially that...
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the national debt is money owed to other nations
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most US debt is...
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interest on bonds sold to finance govt. debt
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economists look at interest payments as a...
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percent of GDP
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wealthy people pay more taxes, but also own more national debt. to pay debt more tax revenue would be transferred from low income citizens who are less likely to own govt. bonds to the wealthier ppl who own bonds. which could further income inequality and wealth GAP
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income distribution
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govt. must pay annual interest on the debt. too much debt means too much interest must be paid with tax revenue each year.raising taxes to pay more debt interest could reduce incentive to invest or work harming GDP
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incentives based on debt interest
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less than half of the national debt is owned by foreigners..
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foreign owned debt
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another name for foreign owned debt. and usually counteracted by americans owning public debt of other nations
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external public debt
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during a recession, when the govt enacts expansionary fiscal policy it can actually...
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harm the private sector investment
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INCREASE in govt borrowing=
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DECREASE in supply of loanable funds, investment, GDP, business investment=INCREASE in interest, govt. spending
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an increase in govt. spending can decrease business investment in the short run, but in the long run...
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and increase in govt. spending can increase GDP by adding goods to the economy and increasing productivity
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investing in public education and job training programs is an investment in...
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human capital that can increase productivity in future years
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investing in public infrastructure like roads, power plants, airports, etc. can..
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increase productivity by allowing for greater production capacity
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public sector investment is not exclusive from..
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private sector investment and vice versa
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increase in G, lowers I due to crowding out effect... much increase in G also..
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increases C
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govt workers who get raises due to increase in G..
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spend their money in the private sector
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increase in G often involves buying private sector goods increasing...
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the ability of some private sector employees to increase business investment
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because public and private sectors are complementary...
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partially offsets the crowding out effect
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why is progressive tax most stable?
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makes most revenue during a boom to pay all deficits
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BE ABLE TO DRAW TAX/GOVT SPENDING GRAPH
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KNOW
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full employment budget is important because
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it gives you a more accurate idea of deficits and surpluses
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long run phillips curve says..
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output always readjusts to the NRU
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KNOW NRU/STAGFLATION GRAPH
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KNOW
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where supply siders and mainstream differ
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level of output
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mainstreamers think
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decrease taxes=increase AS=deficit
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supply siders think
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decrease taxes=increase AS=surplus
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crowding out effect
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when govt borrows money to spend it, it increases D for loanable funds, raising interest rates
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when govt spends more...
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private sector benefits
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SHORT ANSWER: which factors partially offset the crowding out effect
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1. better in long wrong for AS/productivity (infrastructure) 2. public/private complementaries (govt spending goes into the private sector), some business make up for that increase in interest rates....money in G, means money in S and I
