Chapter 16: Fiscal Policy
The multiplier effect is only a consideration for increases in government purchases. (T/F)
False
After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?
No. The increase in defense spending after that date was designed to achieve homeland security objectives.
Fiscal Policy
The federal government efforts to keep the economy stable by increasing or decreasing taxes or government spending.
When is it considered "good policy" for the government to run a budget deficit?
When borrowing is used for long-lived capital goods.
In the long run, increases in government purchases result in:
complete crowding out.
One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase
current income
Each year that the federal government runs a deficit, the federal debt ______
grows
According to the multiplier effect, an initial decrease in government purchases decreases real GDP by _____ the initial decrease in government purchases.
more than
Each year that the federal government runs a surplus, the federal debt
shrinks
The higher the tax rate, the __________ the multiplier effect.
smaller
What is the difference between federal government purchases (spending) and federal government expenditures?
Government purchases are included in government expenditures.
Does government spending ever reduce private spending?
Yes, due to crowding out.
Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge is called:
supply-side economics
What are the gains to be had from simplifying the tax code?
1) Increased efficiency of households and firms. 2) Greater clarity of the decisions made by households and firms. 3) Resources from the tax preparation industry freed up for other endeavors. ANSWER: All of the above.
