Chapter 27
what is an example of expansionary fiscal policy?
a decrease in taxes
when actual GDP is below potential GDP the budget deficit increases because of:
an increase in transfer payments and a decrease in tax revenues
in the long run, increases in government purchases result in
complete crowding out
automatic stabilizers
government spending and taxes that increase or decrease without any actions taken by the government
the term crowding out refers to
government spending increases interest rates and decreases private investment
if the government increases expenditure without raising taxes, this will
increase the budget deficit and require the government to borrow additional funds, cause the interest rate to increase
a policy of decreasing the marginal income tax rate to increase labor supply is intended to result in:
long run supply side effects
The higher the tax rate, the ________ the multiplier effect
smaller
the cyclically adjusted budget deficit is the deficit in the federal government's budget if:
the economy were at potential GDP
fiscal policy refers to
the govs use of taxes and expenditures to achieve macroeconomic policy objectives
Why might cutting government spending as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing inflation?
the legislative process experiences longer delays than monetary policy
when the economy is experiencing a recession automatic stabilizers will cause
transfer payments to increase and tax revenues to decrease
what is considered "good policy" for the government to run a budget deficit?
when borrowing is used for long-lived capital goods.
does government spending ever reduce private spending
yes, due to crowding out