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39 Cards in this Set
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*The changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives |
Fiscal Policy |
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*Who is responsible for fiscal policy? |
Federal Government |
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*Which of the following statement is most accurate regarding fiscal policy and monetary policy? |
Fiscal policy includes changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes i the money supply and interest rates and is controlled by the federal Reserve. Both policies are intended to achieve macroeconomic objectives. |
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*What is expansionary fiscal policy? |
Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand (AD) |
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*What is contractionary fiscal policy? |
Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand (AD) |
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*If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes? |
Enact policies that increase government spending and decrease taxes |
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*What changes should they make if they decide a contractionary fiscal policy is necessary? |
Enact policies that decrease government spending and increase taxes |
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*The corporate income tax rate is increase. This is part of a _______________ fiscal policy |
Contractionary fiscal policy |
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*Defense spending is increased. This is ____________ fiscal policy |
not a part of fiscal policy |
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*The Federal Reserve lowers the target for the federal funds rate. This is ______________ fiscal policy. |
not part of fiscal policy |
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*Families are allowed to deduct all their expenses for daycare from their federal income taxes. This is ____________ fiscal policy. |
not part of fiscal policy |
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*The individual income tax rate is decreased. This is ____________ fiscal policy. |
part of an expansionary fiscal policy |
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*The State of New Jersey builds a new highway in an attempt to expand employment in the state. This is ___________ fiscal policy. |
not part of fiscal policy |
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*Why does a $1 increase in government purchases lead to more than a $1 increase in income and spending? |
Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending. |
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*Define the government purchase multiplier and the tax multiplier. |
Govt. Purchase Multiplier = Change in equilibrium real GDP / Change in govt. purchases Tax Multiplier = Change in equilibrium real GDP / Change in Taxes |
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*Suppose that real GDP is currently $13.3 trillion and potential real GDP is $14.0 trillion, or a gap of $700 billion. The government purchases multiplier is 5.0, and the tax multiplier is 4.0. Holding other factors constant, by how much will government purchase need to be increase to bring the economy to equilibrium at potential GDP? *Government spending will need to be increased by $_______ billion |
$140 billion Govt. Purchase Multiplier = Change in equilibrium real GDP / Change in govt. purchases So... 14.0T - 13.3T / 5.0 --> 700B / 5.0 = 140B |
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*Suppose that real GDP is currently $13.3 trillion and potential real GDP is $14.0 trillion, or a gap of $700 billion. The government purchases multiplier is 5.0, and the tax multiplier is 4.0. Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP? *Taxes will need to be cut by $_____ billion |
$175 billion Tax Multiplier = Change in equilibrium real GDP / Change in Taxes So... 14.0T - 13.3T / 4.0 --> 700B / 4.0 = 175B |
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*Which can be changed more quickly; monetary policy or fiscal policy? |
Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller limner of individuals involved makes it easier it change policy. |
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*What is meant by crowding out? |
Crowding out is a decline in private expenditures as a result of increases in government purchases. |
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*Which of the lo;;owing best describes the difference between crowding out in the short run and in the long run? |
In the short run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase government purchases on aggregate demand. In the long run, mist economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures. |
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*In what ways does the federal budget serve as an automatic stabilizer for the economy? |
During a recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these occur automatically and both effects help stabilize aggregate demand (AD). |
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*What is the cyclically adjusted budget deficit or surplus? |
The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were at potential GDP. |
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*Suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into recession, what will happen to the federal budget? |
If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease. |
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*Why do few economists argue that it would be a good idea to balance the federal budget every year? |
To keep a balanced budget during a recession, taxes would have to increase and government expenditures would have to decrease, which would further reduce aggregate demand and deepen the recession. |
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*What is meant by supply-died economics? |
Supply-side economics refers to the use of taxes ti increase incentives to work, save, invest, and start a business in order to increase long-run aggregate supply. |
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*In favor of a flat tax: |
-There would be a reduction in paperwork and the compliance come of the tax system -There are potential increases in labor supply, savings, and investment from a lower marginal tax rate |
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*Against a flat tax rate: |
-The complexities in the current tax code allow the government to pursue the other policy goals -A change in the tax code would result in a more unequal distribution of income because the marginal tax rate on high-income taxpayers would be reduced. |
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Short-Run Fiscal Policy |
Stabilize business cycles |
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Long-Run Fiscal Policy |
Promote economic growth |
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Employment Act of 1946 |
Allows government to intervene in the economy to promote employment, production, purchasing power |
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Government Purchases |
Spending resulting in acquisition of good or service |
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Government Expenditure |
Includes purchases |
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Expansionary Fiscal Policy |
-Increase govt. purchases -Decrease taxes -AD moves to the right |
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Contractionary Fiscal Policy |
-Decrease in govt. purchases -Increase in taxes -AD shift to the left |
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Big Government |
Expansionary - Increase government spending Contractionary - Raise Taxes |
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Small Government |
Expansionary - Tax Cuts Contractionary - Decrease Spending |
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The series of induced increases in consumption spending that results from an initial increase in autonomous expenditures. |
Multiplier effect |
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Government Purchase Multiplier |
-All money goes to the economy Govt. Purchase Multiplier = Change in equilibrium real GDP / Change in govt. purchases |
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Tax Multiplier |
-Only some money goes to the economy Tax Multiplier = Change in equilibrium real GDP / Change in Taxes |
