Econ Chapter 15
no self adjustment
- Keynes asserted that the private economy was inherently unstable - The inherent instability of the marketplace required government intervention - Policy levers were both effective and necessary
what are the strengths of supply side fiscal policy?
- Lower taxes raise consumers' disposable income. - Higher income encourages workers to work more. - Lower taxes encourage firms to increase output. Weaknesses: - Lower tax revenues hurt government's operations.
what are some examples of mandatory spending?
- Social Security - Medicare - Medicaid
what are the 2 schools of economic thought?
- classical theory - Keynesian theory
to cool down the economy, the government can:
- decrease government spending - decrease transfer payments - increase taxes
to give the economy a boost, the government can:
- increase government spending - increase transfer payments - decrease taxes
what are some examples of discretionary spending?
- military - education - transportation
consensus and disagreement
- most economists agree that expansionary fiscal policy shifts the aggregate demand curve to the right - Problems with lags and politics make fiscal policy undesirable as the primary tool for stabilizing the economy - When market forces and monetary policy can't resolve an economic crisis, most economists support the use of fiscal policy - Most economist now agree that fiscal and monetary policy can affect the unemployment rate in the short run but cannot keep unemployment below the natural rate in the long run
the Keynesian revolution
- the great depression was a stunning blow to Classical economists - Keynes provided an alternative to the Classical theory - Keynes argued that the Great Depression wasn't a unique event - it would recur if reliance on the market to "self adjust" continued
what are some potential problems with fiscal policy?
- timing - politics - crowding out
what can cause pressure and complicate fiscal policy decisons?
- voters - firms - special interest groups - policy makers' own opinions
If Northland has a debt of $5 million in 2014, and runs a deficit of $0.3 million in 2015, and a surplus of $0.4 million in 2016, what would its debt be at the end of 2016, assuming no additional interest is added to its debt? A) $4.3 million B) $4.9 million C) $5.3 million D) $5.7 million se the debt by the same amount.
B
The economy is experiencing increased bouts of inflation. The government decides to intervene by decreasing government spending. What kind of fiscal policy is this, and what effect will it have on aggregate demand?
Contractionary; aggregate demand will shift to the left.
Which of the following would be an example of expansionary fiscal policy? A) An increase in the individual income tax rate B) Extending the period in which unemployed workers can collect unemployment benefits c) A decrease in the amount of federal grants given to college students d) A decrease in interest rates
Extending the period in which unemployed workers can collect unemployment benefits
flexible prices
Producers who can't sell their product have two choices: - reduce output and fire employees OR reduce the price of the product to try to sell more (stimulate quantity demanded) - if prices decrease enough, all the output will be sold - if all output is sold, no jobs are sold
a balanced budget is appropriate only if the resulting aggregate demand is _____ with full employment equilibrium
consistent
Which of the following would constitute an expansionary supply-side fiscal policy?
decreasing the tax on corporate profits
leading indicators
early warnings signs used by economists to assess a mild downswing and the beginning of an economic calamity
Keynesian theory
economic theory centered on the idea that government involvement is sometimes needed to stabilize an economy - Keynes argued that if people demand a product, producers will supply it - If aggregate spending isn't sufficient, some goods will remain unsold and some production capacity will be idled - urges increased government spending or tax cuts as mechanisms for increasing aggregate demand (shifting the AD curve to the right).
classical theory
economic theory rooted in the idea that the economy can stabilize itself and "self adjusts" because of flexible prices and flexible wages
supply side fiscal policy
fiscal policy that focuses on increasing aggregate supply to increase an economy's output and decrease the inflation rate
transfer payments
government payments to individuals or firms for which no good or service is provided in return
contractionary fiscal policy
government policy that shifts the aggregate demand curve to the left - decreases GDP -"restraint"
expansionary fiscal policy
government policy that shifts the aggregate demand curve to the right - increases GDP - "stimulus"
what are the tools of expansionary fiscal policy?
government spending, taxes, and transfer payments
debt
he accumulation of past budget deficits minus past budget surpluses
one persons ______ is another persons _______
spending income
steps of expansionary monetary policy: fiscal stimulus through gov spending
steps 1-3 are the same as the steps for gov spending 4. Consumers aren't going to spend 100% of the tax cut because of the MPC of .8. So the tax cut has to be more than the initial stimulus neede
automatic stabilizers
tax and transfer-payment policies that automatically dampen fluctuations in economic activity
outside lag
the delay between a policy change and its resulting effect on the economy
recognition lag
the delay between the onset of a problem and the realization that it actually exists
implementation lag
the delay between the recognition and implementation of a solution
crowding out
the effect of more government spending causing less private investment
budget deficit
the excess of government expenditures over government revenues over a given period, usually one year
budget surplus
the excess of government revenues over government expenditures over a given period, usually one year
recessionary gap
the gap between the actual output level and the full-employment output level when an economy produces less than its full-employment level of output
inflationary gap
the gap between the actual output level and the full-employment output level when an economy produces more than its full-employment level of output
Fiscal policy refers to government policy regarding:
the money supply and interest rates
fiscal policy
the use of government spending, taxes and transfer payments to help stabilize the economy
steps of expansionary monetary policy: fiscal stimulus through gov spending
1. calculate the multiplier 2. determine the amount of the total stimulus required to move the economy to full employment GDP 3. determine the amount of the initial stimulus needed to result in the total stimulus
Suppose a country has a debt of $20 million. Which of the following events would most add to the debt in the following year? A) An increase in the deficit by $500,000. B) A 3% rise in the interest rate. C) An increase in tax revenues by $600,000. D) All of the above would increase the debt by the same amount.
A
flexible wages
Unemployed workers offer their labor at lower wages - As wage rates decline, becomes more affordable for businesses to hire workers - As wage rates decrease, eventually all workers who want to work are employed
proportional tax
a tax system under which everyone pays the same proportion of their income in taxes.
progressive tax
a tax system under which high-income people pay a higher proportion of their income in taxes than low-income people do. - income goes up tax rate goes up
regressive tax
a tax system under which low-income people pay a higher proportion of their income in taxes than high-income people do. - income goes up tax goes down
say's law
a theory that supply creates its own demand - whatever was produced would be sold - all workers seeking employment would be hired - Unsold goods and unemployed labor could emerge, but both would disappear once people had time to adjust prices and wages
If the economy is operating at point A, then there is _____ gap, and the government can _____ transfers to close this gap.
an inflationary; increase
If there is a recessionary gap, then the economy is producing _____ than its full employment level of output, and the government can use _____ fiscal policy to close the gap.
less; an expansionary