Chapter 16

a cut in taxes rates effects equilibrium real GDP...

1. increases disposable income of households- increases consumption spending 2. increases size of multiplier effect

changes in taxes and spending that happen without actions by the government

automatic stabilizers

occur automatically in recessions

budget deficit

government purchase multiplier

change in equilibrium real GDP/ change in government purchases

tax multiplier

change in equilibrium real GDP/ change in taxes

fiscal policy

changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. Federal government controls.

discretionary fiscal policy

choosing

What is the long run effect of a permanent increase in government spending?

complete crowding out

an attempt to reduce inflation requires _____ fiscal policy, which causes real GDP to _____ and the price level to ____

contractionary, fall, fall

Increased interest rates

crowd out C,I,NX

crowding out

decline in private expenditure as a result of increase in government purchases

crowding out refers to

decline in private expenditures as a result of an increase in gov purchases

contractionary- inflation

decrease gov spending, increase taxes real GDP and price level fall

expansionary fiscal policy

decrease taxes, increase gov spending AD shifts right

what reduces the inflation rate?

decreasing gov purchases or raising taxes slows growth of AD

cyclically adjusted budget deficit or surplus

deficit or surplus in the federal governments budget if the economy were at potential GDP

tax wedge

difference between pretax and post tax return

When the government takes actions to change taxes and spending, the type of policy involved is

discretionary fiscal policy

if the government cuts taxes in order to raise AD,

expansionary fiscal policy- discretionary

what is the relationship between gov purchases and gov expenditures?

federal government expenditures include purchases plus all other federal government spending

automatic stabilizers

government spending and taxes that automatically increase or decrease along with the business cycle

budget deficit

governments expenditures are greater than its tax revenue G>T

budget surplus

governments expenditures are less than its tax revenue G<T

by how much will equilibrium real GDP increase as a result of a 100 billion increase in gov purchases?

greater than 100 billion

the goal of expansionary fiscal policy

increase AD relative to what it would be without policy

if a tax cut has supply side effects then

increase AS by increasing quantity of labor supplied and saving and investment

tax rebates

increase GDP by consumption

tax simplification and reductions in tax rates will result in

increase employment increase LRAS

when the economy is in a recession, the government can

increase gov purchases or decrease taxes in order to increase AD

expansionary - recession

increase gov spending, decrease taxes real GDP and price level rise

the effect on the economy of tax reduction and simplification is

larger quantity of labor supplied. increase in saving, formation of new firms

smaller the tax wedge for any economic activity,

more of that activity will occur

economists use the term fiscal policy to refer to changes in taxing and spending policies by

only the federal government.

increases in government purchases and decreases in taxes have a ____ multiplier effect on equilibrium real GDP, and decreases in government purchases and increase in taxes have a ____ multiplier effect

positive, negative

government spending reduces

private spending

countercyclical fiscal policy

recession-expansionary-increase gov spending/ cut taxes- real GDP and price level increase

when the tax rate increases, the size of the multiplier effect

reduces

the national debt is measure as

refers to federal government debt-accumulation of federal budget deficits over time

gains from simplifying the tax code

resources from the tax prep industry free up other endeavors, increased efficiency of households and firms, greater clarity of the decisions made

according to the crowding out effect, if the federal government increases spending, the demand for money and the equilibrium interest rate will _____, which will cause some consumption, investment ad next exports to _____

rise, increase

if the fed increases gov spending

the demand for money increases, real GDP and income rise.

true about using fiscal policy to stabilize the economy

timing

the largest and fastest growing category of federal expenditures is

transfer payments

Categories of federal government expenditures

transfer payments, interest on national debt, grants to state and local governments

What fiscal policy action increases real GDP in the short run?

increase in government expenditures

contractionary fiscal policy

increase taxes, decreasing gov spending

What is the largest source of federal government revenues?

individual income tax

how would you decompose the total effect of an increase in government purchases on the AD curve?

initial increase causes AD to shift right- raise incomes increase consumption spending

The U.S government increased spending for defense and home security to fund the war. These spending increases are considered

part of defense and homeland security policy, but not fiscal policy

multiplier effect consists of

series of induced increases in consumption spending that result from an initial increase in autonomous expenditures

multiplier effect

series of induced increases in consumption spending that results from an initial increase in autonomous expenditures

we would expect the tax multiplier to be ____ in absolute value than the government purchases multiplier

smaller

government deficit

tax revenues a government receives are less than the amount the gov spends in a fiscal year

T/F Monetary policy can be changed more quickly than fiscal policy

true

example of automatic stabalizer

unemployment benefit program