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25 Cards in this Set
- Front
- Back
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Discretionary Fiscal Policy
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The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability and economic growth
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An increase in government spending will stimulate economic activity. Change in government spending usually involve...
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Military spending
Education spending Budgets for government agencies |
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If there is a recessionary gap, fiscal policy can presumably...
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increase aggregate demand
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If there is an inflationary gap, fiscal policy can presumably...
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decrease aggregate demand
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A rise in taxes causes a _______ because it can reduce consumption spending, investment expenditures, and net exports.
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reduction in aggregate demand
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Crowding-Out Effect
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The tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the private sector; this decrease normally results from the rise of interest rates.
"gov't spending crowds our the private sector" |
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Ricardian Equivalence Theorem
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The proposition that an increase in the government budget deficit has no effect on aggregate demand
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People anticipate that a larger deficit today will mean ....
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higher taxes in the future and adjust their spending accordingly.
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Direct Expenditure Offsets
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Actions on the part of the private sector in spending income that offset government fiscal policy actions
Any increase in government spending in an area that competes with the private sector will have some direct expenditure offset |
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Supply-Side Economics
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The suggestion that creating incentives for individuals and firms to increase productivity will cause the aggregate supply curve to shift outward
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The supply-side effects of changes in taxes
Expansionary fiscal policy could involve reducing marginal tax rates. |
Advocates argue this increases productivity since individuals will work harder and longer, save more, and invest more.
The increased productivity will lead to more economic growth. |
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Recognition Time Lag
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The time required to gather information about the current state of the economy
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Laffer Curve
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The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.
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Action Time Lag
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The time required between recognizing an economic problem and putting policy into effect
- Particularly long for fiscal policy which requires congressional approval |
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Fiscal policy time lags are:
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Long
– a policy designed to correct a recession may not produce results until the economy is experiencing inflation. Variable in length – they can be from 1-3 years, and the timing of the desired effect cannot be predicted. |
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Because fiscal policy time lags tend to be variable, policymakers...
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have a difficult time fine-tuning the economy
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Automatic (or Built-In) Stabilizers
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Changes in government spending and taxation that occur automatically without deliberate action of
- tax system -Unemployment compensation -Welfare spending |
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Incomes and profits fall when business activity slows down, and the government’s tax revenues drop as well.
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Some economists consider this an automatic tax cut, which therefore stimulates aggregate demand.
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Unemployment Compensation and Income Transfer Payments
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Unemployment compensation reduces changes in people’s disposable income. Their disposable income remains positive, although at a lower level.
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Income Transfer (Welfare) Payments
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In a recession, more people are eligible for income transfer payments and do not experience as dramatic a drop in disposable income.
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The key impact of the automatic stabilizer systems is the ability to _______
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mitigate changes in disposable income, consumption, and the equilibrium level of GDP.
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If disposable income is prevented from falling as much as it otherwise would in a recession...
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the downturn will be moderated.
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Fiscal policy during normal times
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Congress ends up doing too little too late to help in a minor recession.
Fiscal policy that generates repeated tax changes (as has happened) creates uncertainty |
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Fiscal policy during abnormal times
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Fiscal policy can be effective
The Great Depression—fiscal policy may be able to stimulate aggregate demand. Wartime—during World War II real GDP increased dramatically. |
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The “soothing” effect of Keynesian fiscal policy
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Should we encounter a severe downturn, fiscal policy is available.
Knowing this may reassure consumers and investors. Stable expectations encourage a smoothing of investment spending. |
