ECON 202 Chapter 13

At the end of fiscal 2016, the federal government's public debt was "only" __________, or ____% of GDP.

$14.1 trillion, 76

At the end of fiscal 2016, the U.S. federal government had total debt equal to

$19.5 trillion.

Social Security trust fund, which was ________ at the end of fiscal 2016.

$2.8 trillion

There are two reasons to be concerned when a government runs persistent budget deficits that result in government debt that rises over time:

1. crowding out: When the economy is at full employment and the government borrows funds in the financial markets, it is competing with firms that plan to borrow funds for investment spending. As a result, the government's borrowing may crowd out private investment spending, increasing interest rates and reducing the economy's long-run rate of growth. 2. Financial Pressure and Default leading to default, which brings economic and financial turmoil.

time lags in fiscal policy

1. recognition lag 2. develop a spending plan lag 3. action lag

Spending for Medicare and Medicaid accounts for approximately _____% of federal spending. 11 21 15 14

21

State and local governments account for about ___% of total government spending, and most government employment.

40

Arguments against the effectiveness of expansionary fiscal policy based upon crowding out are valid only when the economy is

@ or close to full employment

Why would the government want to shift the aggregate demand curve?

Because it wants to close either a recessionary gap, created when aggregate output falls below potential output, or an inflationary gap, created when aggregate output exceeds potential output.

The basic equation of national income accounting is GDP = C + I + G + X - IM. When the government uses fiscal policy to make changes to taxes and transfers, this policy primarily affects: X. C. IM. I.

C.

disposable income equation

DI = National income - Net taxes

fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending.

There are three main arguments against the use of expansionary fiscal policy.

Government spending always crowds out private spending Government borrowing always crowds out private investment spending Government budget deficits lead to reduced private spending

Which country has highest Net Public Debt?

Greece

disposable income

Income remaining for a person to spend or save after all taxes have been paid

Which country has lowest Net Public Debt?

Norway

Savings by government equation

S Government = T − G − TR T is the value of tax revenues, G is government purchases of goods and services TR is the value of government transfers

Implicit liabilities in US govt are

Social Security is the main source of retirement income for most older Americans. Medicare pays most of older Americans' medical costs. Medicaid provides health care to lower-income families. The Affordable Care Act subsidizes health insurance premiums for many low- to moderate-income families who are ineligible for Medicaid.

Which factor is a government transfer? purchases of tanks for the army Social Security payments to retired auto workers wages paid to U.S. senators payments to contractors for repairs on interstate highways

Social Security payments to retired auto workers

budget balance equation

T-G-TR where T is the value of tax revenues, G is government purchases of goods and services TR is the value of government transfers.

social insurance taxes

Taxes collected from employees and employers to pay for major social programs; also known as payroll taxes and social insurance taxes

social security trust fund

The "bank account" into which Social Security contributions are "deposited" and used to pay out eligible recipients.

How do tax policy and government spending affect the economy?

The answer is that taxation and government spending have a strong effect on total aggregate spending in the economy.

Y3 - Y2 Y3 - Y0 Y2 - Y1 Y3 - Y1

Y3 - Y2

And a fall in disposable income, other things equal, leads to

a fall in consumer spending

adopting an expansionary fiscal policy when the economy faces

a recessionary gap

And a rise in disposable income, other things equal, leads to

a rise in consumer spending.

lump-sum tax

a tax that is the same for everyone, regardless of any actions people take.

cyclically adjusted budget balance

an estimate of what the budget balance would be if real GDP were exactly equal to potential output

cyclically adjusted budget balance

an estimate of what the budget balance would be if real GDP were exactly equal to potential output.

adopting a contractionary fiscal policy when the economy faces

an inflationary gap

A rule requiring a balanced budget would undermine the role of _______________.

automatic stabilizers

if a country has rising GDP, economists believe it may safely run annual deficits as long as the debt-GDP ratio is stable or falling bc

because GDP is growing faster than the debt.

But why did health costs grow more slowly?

by offering hospitals rewards if they found ways to save the government money, and penalized them if patients were readmitted too frequently with the same problems

what are changes in federal budget

changes in govt spending or taxation

President Johnson's use of a temporary 10% surcharge on income taxes is a classic example of _____ policy. contractionary fiscal expansionary monetary contractionary monetary expansionary fiscal

contractionary fiscal

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 decrease government purchases; right raise tax rates; right increase government purchases; left

decrease government purchases; left

The budget tends to move into _________ when the economy experiences a _________

deficit; recession

Most economists believe that governments should run budget _______ in bad years and budget ________ in good years.

deficits, surpluses

A change in taxes or a change in government transfers affects consumption through its effect on: the marginal propensity to save. disposable income. government spending. autonomous consumption.

disposable income.

what increases disposable income?

either a decrease in taxes or an increase in government transfers

expansionary fiscal policy

fiscal policy that increases aggregate demand by: An increase in government purchases of goods and services A cut in taxes An increase in government transfers

discretionary fiscal policy

fiscal policy that is the direct result of deliberate actions by policy makers rather than automatic adjustments or rules.

contractionary fiscal policy

fiscal policy that reduces aggregate demand by A reduction in government purchases of goods and services An increase in taxes A reduction in government transfers

two types of government spending

goods and services, transfer payments

The Social Security trust fund is the: government bonds held by the Social Security system. cash held in a savings account by the government. money held by the government from the Medicare tax. interest earned over time by the money from Social Security taxes.

government bonds held by the Social Security system.

debt-GDP ratio

government debt as a percentage of GDP, frequently used as a measure of a government's ability to pay its debts

Deficits and debt are linked, because

government debt grows when governments run deficits

public debt

government debt held by individuals and institutions outside the government.

social insurance

government policy aimed at protecting people against the risk of adverse events

social insurance programs

government programs—like Social Security, Medicare, unemployment insurance, and food stamps—intended to protect families against economic hardship.

automatic stabilizers

government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands without requiring any deliberate actions by policy makers. Taxes that depend on disposable income are the most important example of automatic stabilizers.

Together, these programs currently account for approximately _____ of federal spending.

half

inflationary gaps

in which real GDP is above potential output

recessionary gaps

in which real GDP is below potential output

what reduces disposable income?

increase in taxes or a reduction in government transfers

Refer to 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): decrease in government spending. decrease in transfer payments. increase in taxes. increase in transfer payments

increase in transfer payments

expansionary fiscal policy

increased government purchases of goods and services, higher government transfers, or lower taxes—reduce the budget balance for that year. That is, expansionary fiscal policies make a budget surplus smaller or a budget deficit bigger.

Refer to Figure: Short- and Long-Run Equilibrium II. If the economy is at equilibrium at E1, it is in a(n): recessionary gap. liquidity trap. high level of unemployment. inflationary gap.

inflationary gap.

One of the shortcomings of fiscal policy is that: it affects aggregate demand indirectly through the interest rate. it has significant time lags, which make it more effective. it takes effect immediately, so it is the best policy to use in an economic crisis. it has time lags, so sometimes it may end up destabilizing the economy.

it has time lags, so sometimes it may end up destabilizing the economy.

contractionary fiscal policy shifts the aggregate demand curve.

leftward

The two types of government spending are purchases of goods and services and government transfers. The biggest items in government purchases are

national defense and education

government transfers

payments by the government to individuals for which no good or service is provided in return

Large and persistent budget deficits lead to increases in

public debt

a government that runs persistent budget deficits will experience a rising level of

public debt.

contractionary fiscal policy

reduced government purchases of goods and services, lower government transfers, or higher taxes—increase the budget balance for that year, making a budget surplus bigger or a budget deficit smaller.

Expansionary fiscal policy shifts the aggregate demand curve

rightward

The budget deficit tends to _____ during recessions and _____ during expansions. This reflects the effect of the business cycle on the budget balance.

rise , fall

The national debt _____ when the federal government incurs a _____. falls; deficit rises; deficit rises; surplus stays the same; surplus

rises; deficit

The budget deficit almost always _______ when the unemployment rate rises and _____ when the unemployment rate falls.

rises;falls

Sources of federal tax revenue do NOT include: the corporate profits tax. the personal income tax. sales taxes. social insurance taxes.

sales taxes.

When a family spends more than it earns over the course of a year, it has to raise the extra funds either by

selling assets or by borrowing.`

deficits tend to get ________ or even turn into surpluses when the economy is ________.

smaller;expanding

Most U.S. government spending on transfer payments is accounted for by four programs

sociaal security, medicaire, medicaid, Affordable care act

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. In the United States, the largest implicit liabilities arise from Social Security and Medicare, which promise transfer payments to current and future retirees (Social Security) and to the elderly (Medicare).

Funds flow into the government in the form of ______ and ________; funds flow out in the form of government purchases of goods and services and government transfers to households.

taxes and govt borrowing;

Ricardian Equivalence

that consumers will cut back spending today to offset expected future tax increases

A deficit is

the annual budget shortfall between revenues and expenditures the difference between the amount of money a government spends and the amount it receives in taxes over a given period

According to these projections, spending on Social Security will rise substantially over the next few decades and spending on the major health care programs will soar. Why?

the costs of which are increasing due to the aging of the population and rising medical costs.

budget balance

the difference between tax revenue and government spending

quits rate

the fraction of workers voluntarily leaving their jobs each month. This rate is widely viewed as an indication of how good the labor market is: workers are reluctant to quit if they believe new jobs are very hard to find.

the multiplier is

the ratio of the change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change.

A debt is

the sum of money a government owes at a particular point in time. Debt numbers usually come with a specific date

fiscal year

the time period used for much of government accounting, running from October 1 to September 30 in the United States. Fiscal years are labeled by the calendar year in which they end.

A contractionary fiscal policy pushes the aggregate demand curve

to the left

An expansionary fiscal policy, like the 2009 stimulus, pushes the aggregate demand curve

to the right

a recession moves the budget balance

toward deficit

an expansion moves it

toward surplus

Which factor is an automatic stabilizer? disability payments to war veterans Medicare payments unemployment compensation payments military spending

unemployment compensation payments

In 2009 it became clear that the Greek government had ____________

used creative accounting to hide just how much debt it had already taken on

inflationary gap

when aggregate output is above potential output

recessionary gap

when aggregate output is below potential output

The theory of Ricardian equivalence argues that expansionary fiscal policy: is more effective than expansionary monetary policy. is not effective because it causes higher interest rates and crowds out investment spending. will have no effect on the economy because consumers, anticipating higher taxes to pay for government spending, will decrease spending today to save for the higher taxes. is effective, but contractionary fiscal policy is not.

will have no effect on the economy because consumers, anticipating higher taxes to pay for government spending, will decrease spending today to save for the higher taxes.