ECON #3: FISCAL POLICY

An appropriate fiscal policy response to a recessionary gap would be to decrease which of these?

A decrease in THE PERSONAL INCOME TAX RATE will increase consumption. The resulting increase in aggregate demand will increase real output and decrease the recessionary gap. Changes in the money supply or nominal interest rates count as monetary policy, not fiscal policy.

An income tax rate cut will most likely ____ aggregate demand and _____ aggregate supply.

Cutting taxes will INCREASE BOTH aggregate demand and supply, creating a larger growth in output and GDP.

What does contractionary fiscal policy do to economic growth?

DECREASES in economic growth occur with contractionary fiscal policy. The government uses fiscal policy to either slow or grow the economy.

Discretionary fiscal policy is defined as...

Discretionary fiscal policy refers to ANY CHANGES IN GOVERNMENT SPENDING OR TAXES FOR THE PURPOSES OF EXPANDING OR SHRINKING THE ECONOMY AS NEEDED. This is the part of the budget and laws that the Congress can change without going against laws and mandatory spending requirements of the budget.

If fiscal policy is used to correct a recessionary gap in the economy, what would most likely occur in the short run, allowing for no crowding out?

Expansionary Fiscal Policy should INCREASE rGDP (MOVING IT TO THE RIGHT) AND to equilibrium back to full employment (LRAS), LOWERING UNEMPLOYMENT.

Which action would be a change in the government's fiscal policy?

Fiscal policy is the process by which a government gathers and spends money. AN INCREASE IN TAXES would mean a change in fiscal policy. Unemployment, prices of goods, and revenue collections are connected to fiscal policy, but are not actually policies set by the government.

Fiscal policy is used to promote price stability, full employment, and economic growth by...

Fiscal policy is used to promote price stability, full employment, and economic growth by INCREASING OR DECREASING TAX LEVELS AND PUBLIC SPENDING.

Fiscal policy affects which two parts of aggregate demand directly?

GOVERNMENT SPENDING AND CONSUMPTION affect aggregate demand directly. Aggregate demand is the same as GDP. The components of GDP that are affected directly are government spending and consumption.

Which pairs of operations BEST fit with fiscal policy?

GOVERNMENT SPENDING AND TAXATION is the fundamental principles of fiscal policy. Open market operations and the discount rate are both monetary policies that are used by the Federal Reserve.

What should be a future effect upon the economy if a expansionary fiscal policy continues in an economy with an increasing budget deficit and growing national debt?

HIGH INFLATION is a consequence of expansionary fiscal policy with increased deficit spending and growing national debt. A contractionary fiscal policy should be put into action to reign in the money supply.

CHART: A fiscal policy intended to restore GDP to full employment would be a(an) _____, which will shift the ___ curve ___.

INCREASES IN GOVERNMENT SPENDING will trickle through the economy, increasing employment and increasing AD, SHIFTING AD TO THE RIGHT.

The leaders of a small country decide that they need to enact a contractionary fiscal policy. Which action is consistent with this fiscal policy?

If the country follows a contractionary fiscal policy, it will reduce the size of its budget. It needs to spend less money and keep more of it. One way to do this is to REDUCE GOVERNMENT SPENDING. Lowering the country's discount rate would result in it having less money, since the discount rate is the interest rate that the government charges on loans it makes to banks. The same is true of taxes. Lowering the price of securities relates to the country's money supply.

If the federal government wants to encourage businesses and consumers to spend more money, it would MOST LIKELY...

If the federal government wants to encourage businesses and consumers to spend more money, it would most likely DECREASE THE TAX RATE. This would give people more money to spend which would, in turn, spark the economy... ideally.

Of the following taxes, what is the name for the taxes that all homeowners must pay?

PROPERTY TAX is the tax that is collected from homeowners. "Property" is another word for land or buildings that a person owns.

What happens to the national debt if the government has a $500 billion budget deficit?

THE NATIONAL DEBT INCREASES BY $500 BILLION. If the government ends the year in a deficit, it must borrow the same amount to cover the lack of funds. This adds to the national debt.

In 2008, many United States families received a tax rebate check from the Internal Revenue Service (IRS). Why were tax rebate checks distributed?

Tax rebate checks were distributed under the administration of President George W. Bush TO STIMULATE THE ECONOMY. The government was trying to encourage consumer spending to stimulate the economy.

With regards to economic growth, what is the goal of an expansionary fiscal policy?

The goal of an expansionary fiscal policy is to INCREASE ECONOMIC GROWTH. The government uses fiscal policy to either slow or grow the economy.

Which of these is MOST LIKELY to occur after the government increases taxes?

The government collects taxes to fund programs as well as to reduce debts and deficits. At the same time, higher taxes mean that consumers have to give more money to the government. This leaves consumers with less disposable income and CONSUMER SPENDING DECREASES.

The economy is experiencing rapid inflation, pushing above 9%. Which fiscal policy action should the government implement in an attempt to fix this problem?

The government could RAISE TAXES. Fiscal policy involves the government either changing taxes or how much it spends. In the scenario, the economy is facing high inflation. That means the amount of money in the economy needs to be reduced. The best way to handle that from a fiscal standpoint is to raise taxes so that people have less money to spend and prices would drop.

The economy is experiencing negative GDP growth and high unemployment. Which fiscal policy action should the government implement in an attempt to fix this problem?

The government should INCREASE SPENDING. Fiscal policy involves the government either changing taxes or how much it spends. In the scenario, the government is facing negative GDP and high unemployment. That means they are in a contraction and need to expand. Raising spending is expansionary fiscal policy.