ch17 econ

what has a more powerful effect on the economy

changes in government purchases have a more powerful effect on the economy than equal-sized changes in taxes or transfers

multiplier is effected by

changes in government transfers and taxes

an example of an automatic stabilizer is

tax receipts rising when GDP rises.

government's deficit

tends to increase during a recession

examples of government subsidies

welfare, farm subsidies, social security, medicare/medicaid

to close an inflationary gap with fiscal policy, the government could

reduce budget allocations to interstate highway maintainence

austerity

sharp cuts in spending plus tax increases

when the government borrows funds to pay for budget deficits

private investment spending may be crowded out

Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, it is in a(n)

recessionary gap

discretionary expansionary fiscal policies

reduce the budget balance for that year

the fact that tax receipts fall during a recession

reduces the adverse effect of the initial fall in aggregate demand.

when the economy expands, income tax receipts will

rise, and sales tax revenues will rise

the national debt ___ when the federal government incurs a ___

rises, deficit

MPC

marginal propensity to consume

MPS

marginal propensity to save; aggregate raise in income that consumer saves rather than spends

what could rising debt lead to

government default, which would result in economic and financial turmoil

multiplier equation

1/(1-MPC) or 1/MPS (marginal propensity to save)

expansionary fiscal policy includes

increasing government expenditures

contractionary fiscal policy includes

increasing taxes

if the economy is at equilibrium above potential output, there is a (n) ____ gap, and ____ fiscal policy is appropriate

inflationary; contractionary

lags in fiscal policies

it takes time to create these

the government has a budget surplus if ___ expenditures

its revenues are greater than

when MPC gets smaller...

multiplier gets smaller as well (and VV)

the largest source of federal tax revenue is

personal income taxes

GDP equation

GDP = C + I + G + (X-M)

budget deficit

negative budget balance

debt

sum of money a government owes a particular time

recovery act

American recovery and reinvestment act

why can't a government just print more money

INFLATION

why will debt rise in a recession

because the government is trying to spend more

what can the federal government do to finance a deficit

borrow funds

fiscal policy that decreases aggregate demand is

contractionary

suppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will ___ the ____ effect of the ____ in aggregate demand

decrease; expansionary; increase

when the economy is in a recession, tax receipts ____ and unemployment insurance payments ____

decrease; increase

contractionary fiscal policy

decreases aggregate demand through. reduction in government purchases, increase in taxes, a reduction in government transfer

unfunded manadte

fluctuations in the budget balances are due to the effects of the business cycle

how are debts and deficits linked?

government debt grows when government run deficit

ways to get out of debt

government raises taxes, government stops spending (at least not as much)

the national debt

grows when government runs a deficit

persistent budget deficits

have long-run consequences because they lead to an increase in public debt

spending promises made by the government that are effectively a debt, although they are not included in the usual debt statistics, are known as

implicit liabilities

if the average retirement decreases

implicit liabilities will increase

philosophies on balancing the budget

should we require an annually balanced budget (we would lose the ability to help during a recession) AND should we balance the budget over the business cycle on average (and trust the politicians to keep the long-run budget healthy? NO)

which of the following is a government transfer?

social security payments to retired auto workers

government purchases

social security, defense, education are large in this category

implicit liabilities

spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics

if the government's revenues are greater than its expenditures, then it has a budget:

surplus

when the unemployment rate decreases, the budget

surplus gets larger or the deficit gets smaller

medicare covers much of the cost of medical care for Americans with low incomes

FALSE

when faced with a recessionary gap, the government can increase taxes and cut spending to close it

FALSE

in the basic equation of national income accounting, GDP = C + I + G + X - IM, the government directly controls _____ and influences _____ through fiscal policy

G; C and I

Sgovernment (government saving/surplus)=

T-G-TR; Tax revenues - the Government purchases - TRansfers

budget surplus

a positive budget balance

which of the following is NOT an example of government transfers?

a reimbursement of personal income tax withheld from wages

an inflationary gap occurs when

actual output exceeds potential output

government transfer payments rise when the economy is contracting and fall when the economy is expanding. In this role, transfer payments are described as:

automatic stabilizers

changed in taxes and government transfers shift the aggregate demand curve ___ government purchases

by less than

some argue that budget deficits will lead to reduced private spending because

consumers, anticipating paying higher taxes in the future, will reduce current consumption in order to save money to pay the future taxes.

discretionary fiscal policy

deliberate actions by ploy rather than rules (ex. Obama stimulus), where the government will actually do something and create a bill

deficit

difference between the amount of money a government spends and the amount of money it recieves in taxes over a period of time

If the marginal propensity to consume is 0.75 and government purchases of goods and services decrease by $30 billion, real GDP will:

decrease by $120 billion

if the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to ___, which will shift the AD curve to the ____

decrease government purchases; left

a contractionary fiscal policy either ____ government spending or ____ taxes

decreases, increases

the federal budget tends to move toward ___ as the economy ____

deficit, contracts

Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the government should ___ aggregate demand by ____ taxes to close the ___ gap

expand; cutting; recessionary

Fiscal policy that increases aggregate demand is

expansionary

the effect of a government deficit is

expansionary

a recessionary gap can be closed with

expansionary fiscal policy

the decision to build more aircraft carriers to keep employment high is an example of

expansionary fiscal policy

Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the government should use ___ fiscal policy to shift the aggregate demand curve to the ____

expansionary; right

a change in government transfers shifts the aggregate demand curve by more than a change in government spending for goods and services and has a larger effect on real GDP

false

the budget deficit usually decreases when the unemployment rate increases

false

automatic stabilizers

fiscal policy that causes the economy to be expansionary when it contracts and contractionary when it expands

social security spending is projected to

increase as baby boomers retire

if the actual output lies below potential output, then an appropriate fiscal policy would be to ____, which will shift the ____ curve to the _____

increase government purchases; AD; right.

a government surplus is contractionary because ___ are contractionary

increase in taxation

Look at the figure Short- and Long-Run equilibrium. If the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output is a(n):

increase in transfer payments

discretionary contractionary fiscal policies

increase the budget balance for that year

budget deficits almost always

increase when unemployment increases and fall when unemployment falls.

expansionary fiscal policy

increases aggregate demand

expansionary fiscal policy def

increases aggregate demand through an increase in government purchases, a cut in taxes, and an increase in government transfers; can help to close a recessionary gap; helps to STIMULATE economy

all of the following are sources of federal tax revenue except

sales taxes

governments efforts to stabilize the business cycle through fiscal policy can destabilize the economy because of

the time necessary to draw up a budget appropriate to the circumstances

medicaid, medicare, and social security are examples of

transfer payments

medicaid, food stamps, and sales taxes are all automatic stabilizers

true

one of the lags associated with fiscal policy is the time it takes to recognize that the economy has developed a recessionary or inflationary gap

true

the size of the multiplier increases as the size of the marginal propensity to consume increases

true

taxes increase as gdp rises. this is an example of an automatic stabilizer

trye

the multiplier effect of an increase in transfer payments is smaller than that of an equal increase in government purchases of goods and services because some of the transfer payment is likely to be saved

trye

fiscal policy

use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve

discretionary fiscal policy entails

using government spending or tax policy to affect aggregate demand