Macro-Econ.Ch.13

Progressive Tax System

The average tax rate

Regressive Tax System

The average tax rate falls as GDP rises

Proportional Tax System

The average tax rate remains constant as GDP rises

Smaller

The bigger the MPC, the ______________the tax cut needed to accomplish a specific initial increase in consumption and a specific shift in the aggregate demand curve.

Built in Stabilizer

Anything that increases the government's budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion without requiring explicit action by policymakers.

Cyclically Adjusted Budget (AKA: Full Employment Budget)

An tool that economists use to adjust actual federal budget deficits and surpluses to account for the changes in tax revenues that happen automatically whenever GDP changes. The cyclically adjusted budget measures what the federal budget deficit or surplus would have been under existing tax rates and government spending levels if the economy had achieved its full employment level of GDP (its potential output)

Increase

A sufficient _______________ of taxes will shift the economy's aggregate demand curve to the left.

Increase

A sufficient ___________________ in government spending will shift an economy's aggregate demand curve to the right

Left

A sufficient decrease in government spending will shift an economy's aggregate demand curve to the ______________________.

Right

A sufficient reduction of taxes will shift the economy's aggregate demand curve to the ________________.

Multiplier Formula

(100)-((original output/new output)x100)=x.xx%

Ways Government can Eliminate the Inflationary Gap

-Decrease government spending -Raise taxes -Use some combination of the two

Factors of Fiscal Policy

-Increase government spending -Reduce taxes -Use combination of the two

Expansionary Fiscal Policy

Consists of government spending increases, tax reductions, or both, designed to increase aggregate demand and therefore raise real GDP.

Contractionary Fiscal Policy

Consists of government spending reductions, tax increases, or both, designed to decrease aggregate demand and therefore lower or eliminate inflation.

Expansionary

Cyclically Adjusted Budget Deficits signal what? (Expansionary or Contractionary) Decreased taxes and/or increased government spending

Contractionary

Cyclically Adjusted Budget Surpluses signal what? (Expansionary or Contractionary) Increased taxes and/or reduced government spending

Yes

Do net tax revenues vary directly with GDP?

Budget Deficit

Government spending in excess of tax revenues

By Fluctuating Levels of Government Spending

How can aggregate demand be controlled?

Inflationary; Decrease; Inflexible; Recession

How could the Ratchet Effect ultimately lead to a recession? Well, the increase in government spending could lead to an __________________ gap. If government decided to reduce spending, this would lead to a _______________ in output (GDP) and, because of the Ratchet Effect and the _____________________ prices, the economy would experience a _____________________. This is because the increased government spending results in an increase in aggregate demand, creating demand-pull inflation. The Ratchet Effect keeps the prices high after the government reduces government spending in an attempt to eliminate the inflationary gap. These high prices reduce aggregate demand, which ultimately leads to lower output. Which all leads to a recession because of the low demand, high unemployment, and low GDP.

Progress Tax System Formula

Tax Revenue / GDP

Net Taxes Formula

Tax Revenues - (Transfers + Subsidies) This term is also known as "taxes"

Budget Surplus

Tax revenues in excess of government spending

Smaller

The _________________ the MPC, the greater the tax cut needed to accomplish a specific initial increase in consumption and a specific shift in the aggregate demand curve.

Relative to the Size of the Economy

The expansionary or contractionary strength of any change in discretionary fiscal policy depends not on its absolute size but on how large it is ___________________________.

Decrease

The government can __________________ aggregate demand by reducing government spending.

Increase

The government can ____________________ aggregate demand by raising government spending.

The Greater the Economy's Built in Stability

The more progressive the tax system, _________________________________.

More

To increase initial consumption by a specific amount, the government must reduce taxes by ________________ than that amount.

Transfer Payments

Unemployment compensation, welfare payments, etc. AKA: negative taxes

Initial Consumption Spending

What does the dashed line on the graphs represent?

The Inflexible Prices

What makes the Ratchet Effect similar to a ratchet?

Regressive Tax System

Which tax system has the steepest line of T (taxes)?

Conservative Economist

Which type of economist advocates for tax cuts during a recession?

Conservative Economist

Which type of economist encourages cuts in government spending during demand-pull inflation?

Liberal Economist

Which type of economist recommends tax increases during demand-pull inflation?

Liberal Economist

Which type of economist recommends that government spending be increased during recessions?

Expand; Downward

While increases in aggregate demand that ____________ real output beyond the full-employment level tend to ratchet the price level upward, declines in aggregate demand do not seem to push the price level ___________________ .

Because Tax Cuts Induce an Increased Level of Saving

Why is the tax cut amount normally supposed to be larger than the proposed amount of government spending?

The Ratchet Effect

increases in aggregate demand ratchet the U.S. price level upward, while lowering aggregate demand has no effect on the price level.

Discretionary Fiscal Policy

the purposeful change of government expenditures and tax collections by government to promote full employment, price stability, and economic growth