Macroeconomics Chapter 13 (Unit 3) – Flashcards

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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
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False
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TRUE or FALSE: The primary objective of fiscal policy is to stabilize the size of the federal debt.
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False
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TRUE or FALSE: A contractionary fiscal policy is designed to decrease short-run aggregate supply
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False
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An expansionary fiscal policy is designed to ___________________ aggregate ____________________
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Increase ....... Demand
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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?
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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?
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relying on the automatic stabilizers
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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.
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False
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TRUE or FALSE: Tax rates are an example of an automatic stabilizer
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False
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The crowding-out effect suggests that increases in consumption are usually at the expense of saving
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False
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A budget deficit arises when federal government expenditures are increasing
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False
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The public debt is the accumulation of household, business, and government debt over time
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False
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A significant contributor to, or cause of, the large U.S. public debt is the financing of additional gross private domestic investment by businesses.
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False
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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
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False
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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
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Increase....... $130
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What is fiscal policy?
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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.)
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What is the objective of expansionary fiscal policy?
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to close a recessionary gap (recession) by increasing aggregate demand
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What is the objective of contractionary fiscal policy?
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to close an inflationary gap (boom) by decreasing aggregate demand
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What is aggregate demand?
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A schedule or curve that shows the total quantity of goods and services that would be demanded (purchased) at various price levels
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fiscal policy can be either _______ or ________________
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discretionary .... non discretionary
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What does discretionary mean?
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the power or right to decide or act according to one's own judgment; freedom of judgment or choice. (synonym: judgement)
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What is another word for discretionary fiscal policy?
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active fiscal policy
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what is discretionary(active) fiscal policy?
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It means that congress actually meets to implement changes in government expenditures and/or taxes to close an output gap
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What is another name for non-discretionary fiscal policy?
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passive or automatic fiscal policy
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which fiscal policy actively manipulates aggregate demand?
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discretionary fiscal policy
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What are some examples(causes/reasons) of a negative GDP gap or recession?
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1.) High unemployment ( cyclical= repeated) 2.) Actual GDP natural rate
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What is a solution to a negative GDP gap or recession?
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-Increase aggregate demand -Speed up the economy to reduce high employment
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For expansionary fiscal policy, what are some policy options for congress?
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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
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What does the term inflation mean?
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A rise in the general level of prices in an economy, an increase in an economy's price level
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What is budget deficit?
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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
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What is budget surplus?
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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.
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multiplier effect equation
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- triangleGDP= m x triangle (spending)
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Initial increase in C, Ig, and/or G causes larger ______________ in real GDP
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increase
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Anticipated impact on the economy after solution for expansionary fiscal policy is.....
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1.) Multiplier effect: Initial increase in C, Ig, and/or G causes larger increase in real GDP 2.) Aggregate demand increases
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What are the final results of Expansionary fiscal policy?
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1.) Unemployment falls 2.) Negative GDP gap closed 3.) Actual GDP= potential real GDP 4.) Unemployment rate= natural rate
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What are some examples/causes of Positive GDP gap or economic boom?
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1.) Demand-pull inflation 2.) Actual GDP> potential real GDP 3.) Unemployment rate < natural rate
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What is a solution to a positive GDP gap or economic boom?
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- Decrease aggregate demand - Slow down the economy to reduce demand-pull inflationary pressures
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What is demand-pull inflation?
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Increases in the price level (inflation) resulting from increases in aggregate demand ; "too much spending chasing too few goods"
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For contractionary (contract means shrink) fiscal policy, what are some policy options for congress?
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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
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Anticipated impact on the economy after solution for contractionary fiscal policy is.....
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1.) Multiplier effect: Initial decrease in C, Ig, and/or G causes larger decrease in real GDP 2.) Aggregate demand decreases
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What are the final results of Contractionary fiscal policy?
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1.) Demand-pull inflationary pressures fall 2.) Positive GDP gap closed 3.) Actual GDP= potential real GDP 4.) Unemployment rate= natural rate
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Level of taxes INCREASE in the level of taxes on real GDP: if TX increase, Income __________, C decreases (S decreases), and GDP ___________
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decreases ..... decreases
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Level of taxes INCREASE in the level of taxes on real GDP: If taxes increase by $x, then disposable income ______________ by $x
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decreases
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Level of taxes INCREASE in the level of taxes on real GDP: If disposable income decreases by $x, then C and S ______________
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decrease
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Level of taxes INCREASE in the level of taxes on real GDP: To find by how much C decreases what formula should be used?
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MPC x triangle Disposable income = triangle C
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Level of taxes INCREASE in the level of taxes on real GDP: If C decreases , then real GDP ____________
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decreases
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Level of taxes INCREASE in the level of taxes on real GDP: To find by how much GDP decreases, what formula should be used?
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triangle real GDP = multiplier x triangle C
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Level of taxes DECREASE in the level of taxes on real GDP: If TX decrease, Income __________, C increases (S increases ) , and GDP __________
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increases ..... increases
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Level of taxes DECREASE in the level of taxes on real GDP: If taxes decrease by $x, then disposable income ________ by $x
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increases
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Level of taxes DECREASE in the level of taxes on real GDP: If disposable income increases by $x, then C and S _____________
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increase
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To find by how much C increases, what formula should be used?
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MPC x triangle disposable income = triangle C
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If C increases , then real GDP _____________
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increases
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To find by how much GDP increases, what formula should be used?
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triangle real GDP = multiplier x triangle C
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What does C mean in the formulas?
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consumer spending
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What does G mean in the formulas ?
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Government spending
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A $10 billion increase in government spending will ____________ real GDP
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increase
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A $10 billion increase in taxes will ___________ GDP
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decrease
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To find out an increase in government spending in regards to GDP, what equation should be used?
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triangle real GDP = multiplier x triangle G
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Non- discretionary fiscal policy (automatic stabilizers, built-in stability) passively _____________ aggregate demand
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manipulates
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Certain government programs, once they are in place, will _____________ stabilize the economy
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automatically
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A built-in stabilizer is anything that :
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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
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What are some examples of automatic stabilizers?
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1.) Personal income tax, corporate income tax, sales tax, payroll tax revenues 2.) Unemployment compensation 3.) Welfare payments
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Non discretionary policy automatically moves the federal budget towards a _________ during a recession
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deficit ( speed up economy )
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Non discretionary policy automatically moves the federal budget towards a ____________ during a period of demand-pull inflation (boom)
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surplus
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What are the advantages of the automatic stabilizers?
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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
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The more progressive the tax system ( higher marginal tax rates ) the more _________ the economy
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stable
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The more progressive(growing,continuous) the tax system ( higher marginal tax rates= more taxing ) the more stable the economy because
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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
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What is disposable income?
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income after taxes and transfers
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What is MPC?
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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.
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What is a multiplier?
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change in real GDP/ Initial change in spending
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The less progressive the tax system (lower marginal tax brackets = less taxing) the _______ stable the economy
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less
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Cyclically adjusted budget: what does it do?
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Adjusts the actual federal budget deficit ( or surplus) for non-discretionary outcomes
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Cyclically adjusted budget: For a given T and G, a cyclical deficit automatically occurs as the economy enters a ___________
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recession
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Cyclically adjusted budget removes the deficit that is simply a by-product of the recession to determine the ____________, ___________, __________, or ___________
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government's overall policy, expansionary, contractionary, or neutral
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Cyclically adjusted budget: If T shifts down and/or G shifts up (discretionary), then fiscal policy is
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expansionary
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Cyclically adjusted budget: If T shifts up and/or G shifts down (discretionary) , then fiscal policy is
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contractionary
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What are the reasons why fiscal policy may destabilize the economy?
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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)
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What is budget deficit? (G>Tx)
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Amount by which government expenditures exceed tax collections in a given year
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What does Tx stand for ?
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taxes
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What is budget surplus? (G < Tx)
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Amount by which tax collections exceed government expenditures in a given year
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What is public (national) debt
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Accumulation of federal budget deficits and surpluses over time
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The public debt consists of :
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-Treasury bills -Treasury notes -Treasury bonds -U.S. savings bonds
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When the federal government runs a budget deficit, it makes up the difference by ..
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having the department of the Treasury issue new U.S. Treasury securities
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If the federal government incurs a budget deficit, then the U.S. public debt will _________
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increase
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If the federal government incurs a budget surplus, then the U.S. public debt will ___________
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decrease
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If the federal government has a balanced budget, then the U.S. public debt will ___________
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no change
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What are the sources or causes of budget deficits and thus a large public debt
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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
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Will large public debt bankrupt the federal government?
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no
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Federal government can meet its financial obligations if there's a large public debt by:
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1.) Refinancing maturing Treasury securities 2.) Increasing taxes 3.) Creating money (through the federal reserve in a national emergency)
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Is the public debt a burden on future generations? Explain.
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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
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Will the public debt increase income inequality? (Yes)
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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
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Will the public debt increase income inequality? (No)
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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
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What is the crowding-out effect ?
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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.
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What is the crowding-out effect and why it affects the fiscal policy in terms of destabilizing the economy ?
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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
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What does Ig stand for?
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private-sector investment spending
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