Econ Fiscal Policy & Debt Sapling

(a) Cut spending equal to the reduction in tax revenue (b) The negative consequences of the recession are magnified.

(a) If the government is required to balance the budget and the economy falls into a recession, which of the actions is a feasible policy response? (b) What is a likely consequence of this policy?

Government Debt

*Budget surplus/Budget deficit/Balanced Budget/Government debt* The total accumulated amount that the government has borrowed and not yet paid over time

Balanced Budget

*Budget surplus/Budget deficit/Balanced Budget/Government debt* When government spending and taxes are equal

Budget deficit

*Budget surplus/Budget deficit/Balanced Budget/Government debt* When the federal government spends more than it collects in taxes in a given time period

Budget surplus

*Budget surplus/Budget deficit/Balanced Budget/Government debt* When the government receives more in taxes that it spends in a given time period

Discretionary spending

*Discretionary spending/Automatic stabilizers* A bill is passed to increase unemployment benefit payments

Discretionary spending

*Discretionary spending/Automatic stabilizers* A law is enacted that increases Medicare coverage

Automatic stabilizers

*Discretionary spending/Automatic stabilizers* A reduction in tax revenue that results from a recession reduces personal income and corporate profits

Automatic stabilizers

*Discretionary spending/Automatic stabilizers* An increased number of layoffs increases government spending on unemployment benefits

Discretionary spending

*Discretionary spending/Automatic stabilizers* Congress votes to cut government spending in order to balance the budget

Automatic stabilizers

*Discretionary spending/Automatic stabilizers* Economic growth increases personal and corporate income, increasing tax payments

Automatic stabilizers

*Discretionary spending/Automatic stabilizers* Government spending on welfare increases due to an increase in applicants

Discretionary spending

*Discretionary spending/Automatic stabilizers* The government cuts taxes to stimulate consumer spending

Discretionary Spending

*Discretionary spending/Automatic stabilizers* The government increases tax rates to prevent inflation

Contractionary fiscal policy

*Expansionary/Contractionary/None* Decrease in government spending

Not an example of fiscal policy

*Expansionary/Contractionary/None* Decrease in money supply

Expansionary fiscal policy

*Expansionary/Contractionary/None* Decrease in taxes

Contractionary fiscal policy

*Expansionary/Contractionary/None* Decrease in transfer payments

Not an example of fiscal policy

*Expansionary/Contractionary/None* Decrease in unemployment rate

Not an example of fiscal policy

*Expansionary/Contractionary/None* Increase in corporate bonds purchased

Expansionary fiscal policy

*Expansionary/Contractionary/None* Increase in government spending

Not an example of fiscal policy

*Expansionary/Contractionary/None* Increase in money supply

Contractionary fiscal policy

*Expansionary/Contractionary/None* Increase in tax rates

Supply-side fiscal policy

*Expansionary/Supply-side/Contractionary* Encourage human and capital development

Expansionary fiscal policy

*Expansionary/Supply-side/Contractionary* Government spend money on anything

Expansionary fiscal policy

*Expansionary/Supply-side/Contractionary* Lowers unemployment and increases inflation

Supply-side fiscal policy

*Expansionary/Supply-side/Contractionary* Reduce regulations on businesses

Contractionary

*Expansionary/Supply-side/Contractionary* The goal is to lower inflation and increase unemployment

Supply-side fiscal policy

*Expansionary/Supply-side/Contractionary* The goal is to lower unemployment and prices

4.83-4.71= 0.12 Budget Balance: $0.12 billion -Budget surplus

Lilliput is a country that has closed borders and does not import or export any goods or services; hence, they do not worry about trade with other countries. Total spending for the federal government of Lilliput for the last fiscal year was $4.71 billion. The country collected $4.83 billion in taxes during this same fiscal year. Assume government transfers were zero. Based on this information, what is Lilliput's budget balance? In the last fiscal year, lilliput was running....

Earliest Lag -> Latest -Information -Recognition -Decision -Implementation

Place the fiscal policy timing lags in order from earliest to latest.

both demand‑side and supply‑side

Reducing tax rates is which type of fiscal policy?

Aggregate demand shifts right

Suppose that the government engages in *expansionary fiscal policy* by *increasing government spending*.

Automatic stabilizers have a similar impact as discretionary fiscal policy but occur automatically, without action by the government. Automatic stabilizers increase aggregate demand during recessions and reduce aggregate demand during expansions.

Whats the role of automatic stabilizers in the economy

Jack wants to borrow money to create a cowboy-themed inflatable bounce house for kids called "Wild Wild West." However, the government is running a deficit which has increased interest rates so much that Jack can no longer afford to borrow the money.

Which of the situations is an example of the crowding-out effect on investment as it pertains to macroeconomics?

supply‑side

Which type of fiscal policy takes longer to affect the economy: demand‑side or supply‑side?

-Deficits can lead to private investment spending being crowded out. -Debt places an increased burden on the economy in the future. -The likelihood of default increases.

Why are persistent budget deficits worrisome?