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46 Cards in this Set

  • Front
  • Back

What is a Fiscal Policy?

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply. Defined as discretionary meaning "active"

What is the Council of Economic Advisors?

a group of three economists appointed by the president to provide expertise and assistance on economic matters. Discretionary changes in government spending and taxes are at the option of the Federal government. They do not occur automatically

What is non-discretionary mean?

Changes that occur without congressional action or ("passive" or "automatic")

What is an expansionary fiscal policy?

Expansionary fiscal policy is designed to stimulate the economy during or anticipation of a business-cycle contraction. This is accomplished by increasing aggregate expenditures and aggregate demand through an increase in government spending (both government purchases and transfer payments) or a decrease in taxes. Ex: when recession occurs

What options does the Federal government have when trying to adopt a fiscal policy that will stimulate the economy?

1.) increase government spending

2.) reduce taxes

3.) use some combination of the two

What will happen if the Federal budget is balanced?

the expansionary fiscal policy will create a government budget deficit-government spending in excess of tax revenues

What does aggregate mean?

form or group into a class or cluster.

What happens with increased government spending?

This will shift the economy's aggregate demand curve to the right

What does MPC mean?

marginal propensity to consumeIn economics, the marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers).

What happens when the government reduces taxes?

the aggregate demand curve shifts rightward

What is a contractionary fiscal policy?

This is accomplished by decreasing aggregate expenditures and aggregate demand through a decrease in government spending (both government purchases and transfer payments) or an increase in taxes. Contractionary fiscal policy leads to a smaller government budget deficit or a larger budget surplus.

What if the government looks to fiscal policy to eliminate the inflationary GDP gap?

1) decrease government spending

2) raise taxes

3) use combination of both

What is a budget surplus?

A budget surplus is a situation in which income exceeds expenditures. The term "budget surplus" is most commonly used to refer to the financial situations of governments; individuals speak of "savings" rather than a "budget surplus." A surplus is considered a sign that government is being run efficiently.

What happens with decreased spending in relation to eliminating the inflationary GDP gap?

shifts the aggregate demand curve leftward to control demand-pull inflation

What is demand-pull inflation?

Demand-pull Inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods".

When GDP rises, how will any tax yield more tax revenue?

Personal income taxes have progressive rates and thus generate more-than-proportionate increases in tax revenues as GDP expands. As GDP rises, and more goods and services are purchased, revenues from corporate income taxes and from sales taxes and excise taxes also increase. Similarly, revenues from payroll taxes rise as economic expansion creates more jobs.

What makes transfer payments and tax revenues different?

Unemployment compensation payments and welfare payments decrease during economic expansion and increase during economic contraction

What is a built-in stabilizer?

anything that increases the government's budget deficit (or reduces it's budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion without requiring explicit action by policymakers

How are tax rates and revenues related to the level of GDP?

Congress decides on a particular level of spending, but it does not determine the magnitude of tax revenues. Instead, it establishes tax rates, and the tax revenues then vary directly with the level of GDP that the economy achieves.

What happens to tax revenues and GDP during a time of prosperity?

Tax revenues automatically increase as GDP rises, and since taxes reduce household and business spending, they restrain the economic expansion. As the economy moves toward a higher GDP, tax revenues automatically rise and move the budget from deficit to surplus

What happens to GDP and tax revenues during a recession?

As GDP falls during a recession, tax revenues automatically decline, increasing spending and cushioning the economic contraction. With a falling GDP, tax receipts decline and move the government's budget from surplus toward deficit

What is a progressive tax system?

the average tax rate (=tax revenue/GDP) rises with GDP. The more progressive the tax system, the greater the economy's built-in stability

What is a proportional tax system?

the average tax rate remains constant as GDP rises

What is a regressive tax system?

the average tax rate falls as GDP rises

What is a discretionary fiscal policy?

changes in tax rates and expenditures

What is a monetary policy?

central bank- caused changes in interest rates

What is the standardized budget?

measures what the Federal budget deficit or surplus would have been under existing tax rates and government spending levels if the economy had achieved its full-employment level of GDP (its potential output). Comparing actual government expenditures with the tax revenues that would have occured

What is an example to tell if a fiscal policy is neutral?

the standardized budget deficit in year 1 is zero- government expenditures equal the tax revenues forthcoming at the full employment output GDP. (Information from graph on page 614)

What is an example to tell if the fiscal policy is expansionary?

As a percentage of potential GDP, the standardized budget deficit has increased from zero in year 3 (before tax-rate cut) to some positive percent in year 4. This increase in the relative size of the full-employment deficit between two years reveals the new fiscal policy is expansionary. (graph on page 614)

What is an example to tell if the fiscal policy is contractionary?

If we observed a standardized deficit of zero in one year, followed by a standardized budget surplus the next the fiscal policy changes from being neutral to contractionary. Since the standardized budget adjusts for the automatic changes in tax revenues, the increase in standardized budget surplus reveals the government either decreased its spending or increased tax rates such that tax revenues increased.

What is a recognition lag?

the time between the beginning of recession or inflation and the certain awareness that it is actually happening. This lag arises because the economy does not move smoothly through the business cycle

What is an administrative lag?

the wheels of democratic government turn slowly. There will typically be a significant lag between the time the need for fiscal action is recognized and the time the action is taken

What is an operational lag?

a lag occurs between the time fiscal action is taken and the time that action affects output, employment, or the price level. Although changes in tax rates can be put into effect relatively quickly once new laws are passed, government spending on public works-new dams, interstate highways and so on- requires long planning periods and even longer periods of construction.

Why are fiscal policies of state and local governments pro-cynical? (they worsen rather than correct recession or inflation)

Unlike the Federal government, they face constitutional or other legal requirements to balance their budgets. During prosperity they increase their expenditures and cut them during recession.

What happened with local and state governments during and after the recession?

they had to offset lower tax revenues resulting from the reduced personal income and spending of their citizens. They offset the decline in revenues by raising tax rates, imposing new taxes, and reducing spending

What is the crowding-out effect?

A situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending

What is the national or public debt?

the total accumulation of the deficits (minus the surpluses) the Federal government has incurred through time. These deficits have emerged mainly through war financing, recessions and fiscal policy

What are U.S securities?

financial instruments issued by the federal government to borrow money to finance expenditures that exceed tax revenues. The total public debt of 9 trillion represents the total amount of money owed by the Federal government.

What are the four types of U.S securities?

1.) Treasury bills (short term securities)

2.) Treasury notes (medium-term securities)

3.) Treasury bonds (long-term securities)

4.) U.S saving bonds (long-term, non marketable bonds)

Why does the U.S public debt not threaten to bankrupt the Federal government?

1.) refinancing

2.) taxation

How is the public debt refinanced?

the government refinances the debt by selling new bonds and using the proceeds to pay holders of the maturing bonds. The new bonds are in strong demand because lenders can obtain a relatively good interest return with no risk of default by the Federal governement

How is can the public debt decrease by taxation?

the Federal government has the constitutional authority to levy and collect taxes. A tax increase is a government option for gaining sufficient revenue to pay interest and principle on the public debt

What is an external public debt?

enables foreigners to buy some of our output. In return for the benefits derived from the borrowed funds, the U.S transfers goods and services to foreign lenders.

What will the borrowing and interest payments associated with public debt do?

1) increase income inequality

2.) require higher taxes, which may dampen incentives

3.) impede the growth of the nation's stock of capital through crowding out of private investment

What is a regressive tax?

a tax in which people with higher incomes pay a smaller share of their income in tax

What is a progressive tax?

a tax that takes a larger percentage from the income of high-income earners than it does from low-income individuals.