marco ch 13 – Flashcards
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Fiscal stimulus that increases an existing government budget deficit​ ______ loanable funds and​ ______ investment.
A. decreases the demand​ for; increases
B. decreases the supply​ of; decreases
C. increases the demand​ for; decreases
D. increases the demand​ for; increases
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C. increases the demand​ for; decreases
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Fiscal policy attempts to achieve all of the following objectives except​ ______.
A. a stable money supply
B. price level stability
C. full employment
D. sustained economic growth
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A. a stable money supply
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An economy is experiencing a recessionary gap. The government can​ ______.
A. increase expenditure or cut taxes to increase aggregate demand
B. raise taxes or decrease the quantity of money to decrease​ long-run aggregate supply
C. raise taxes to decrease​ long-run aggregate supply
D. increase expenditure or cut taxes to increase​ short-run aggregate supply
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A. increase expenditure or cut taxes to increase aggregate demand
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A country has been in existence for only two years.
In the first​ year, receipts were​ $1.0 million and outlays were​ $1.5 million.
In the second​ year, receipts were​ $1.5 million and outlays were​ $2.0 million.
At the end of the second​ year, the government had issued debt worth​ ______.
A. ​$1 million
B. ​$0.5 million
C. minus−​$0.5 million
D. minus−​$1 million
answer
A. ​$1 million
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Fiscal policy is more effective if the MPC is​ ______, which is more likely if tax cuts are targeted for​ _____ income households.
A. ​lower, higher
B. ​lower, lower
C. ​higher, higher
D. ​higher, lower
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D. ​higher, lower
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A tax on labor income​ ______.
The equilibrium quantity of labor​ ______.
A. decreases the supply of labor and increases the demand for​ labor;
increases
B. decreases the supply of labor and increases the demand for​ labor;
decreases
C. decreases the supply of​ labor;
decreases
D. decreases the demand for​ labor;
decreases
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C. decreases the supply of​ labor;
decreases
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At the new equilibrium quantity of​ labor, the​ before-tax wage rate ▼ falls/rises
and the​ after-tax wage rate ▼ rises/falls
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rises
falls
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The relationship between the​ _____ is called the Laffer Curve.
A. interest rate and the inflation rate
B. tax rate and the amount of tax revenue collected
C. tax rate and economic growth rate
D. the amount of tax revenue collected and the exchange rate
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B. tax rate and the amount of tax revenue collected
If tax rate is too high, people work less, less to tax => Revenues decrease.
TAX REV = TAX RATE x TAX BASE
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Explain the difference between the national debt vs. federal budget deficit
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Deficit is annual (flow)
Debt is accumulated total (stock)
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Discretionary fiscal policy
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- when federal government specifically acts to influence economy through use of fiscal policy such as spending changes or tax changes
*Recessionary gap
*Full employment
*Expansionary or inflationary gap
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Discretionary Fiscal Policy:
effects on AD of a change in G
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Changing government spending (usually Federal government)
C + I + G + X - M => AD
Increase G, AD increases
Decrease G, AD decreases
1 / (1-MPC)
AD shifts by amount equal to:
(change in G) x (expenditure multiplier)
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Discretionary Fiscal Policy:
effects on AD of a change in T
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C(taxes) + I(taxes) + G + X - M
Decrease in taxes, C or I increase, depending on type of tax
AD increases with decrease in taxes
- MPC / (1-MPC)
AD shifts by amount equal to:
(change in T) x (tax multiplier)
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When is MPC likely to be larger?
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Fiscal policy is more effective if the MPC is​ higher, which is more likely if tax cuts are targeted for​ lower income households.
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Fiscal policy is more effective
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When is the multiplier high (When are people likely to spend)?
When there is no crowding out
-Recession
-International borrowing
-Interest rates low
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When should G or T be increased or decreased?
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Decrease G
Increase T
to correct deficit
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Know what is meant by automatic vs. discretionary fiscal policy
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Automatic stabilizers= changes in tax revenues or government spending that occur without overt action by Congress or policymakers
-Progressive income tax
-Means-tested programs; unemployment insurance
*Discretionary and automatic fiscal policy can help smooth business cycles...
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Supply side issues: Tax wedges
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Taxes change incentives:
-Income tax (work less)
-Tax on corporate profits (invest less)
-Tax on dividends (save less)
-Tax on capital gains (save less)
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Potential harms of national debt and the issues with trying to reduce the debt
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Higher interest
Less national saving available for investment
Less ability to deal with unexpected issues
-Wars
-Downturns
Higher probability of crisis
Harms of correcting:
Unemployment
Loss of human capital
Poverty => families
Long Run Harm (debt) vs. Short Run Harm (recessionary gap)
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Regressive Taxes
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As income increases, percentage of income paid as tax decreases
Marginal Tax Rate decreases
Social Security tax, sales tax
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Progressive Taxes (relative to income)
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As income increases, percentage of income paid as tax increases
Marginal Tax Rate increases
Example: Federal Income tax
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Flat or proportional tax
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As income increases, percentage of income paid as tax is same
Constant marginal tax rate
