Economics Ch. 16
What is the law-making time lag? (Pg 406)
The amount of time it takes Congress to pass the laws needed to change taxes or spending.
What are the four limitations of discretionary fiscal policy? (Pg 406)
1. Law-making time lag 2. Shrinking are of law-maker discretion 3. Estimation potential GDP 4. Economic forecasting
Know the terms: automatic fiscal policy, discretionary fiscal policy, automatic stabilizers, and induced taxes. (Pg 402)
Automatic fiscal policy: a fiscal policy action that is triggered by the state of the economy. Discretionary fiscal policy: a final policy action that is initiated by an act of Congress. Automatic stabilizers: features of fiscal policy that stabilize real GDP without explicit action by the government. Induced taxes: taxes that vary with real GDP.
Know the terms: federal budget, fiscal policy, balanced budget, budget surplus, budget deficit, and national debt. (Pg 396-397)
Federal budget: an annual statement of the tax revenues outlays and surplus or deficit of the government of the United States. Fiscal policy: the use of the federal budget to achieve the macroeconomic objectives of high and sustained economic growth and full employment. Balanced budget: the budget balance when tax revenues equal outlays. Budget surplus: the positive budget balance when tax revenues exceed outlays. Budget deficit: the negative budget balance when outlays exceeds tax revenues. National debt: the amount of government debt outstanding- debt that has arisen from past budget deficits.
What are the two effects of a tax cut? (Pg 414)
It increases aggregate demand and aggregate supply. It also increases real GDP.
On a fiscal stimulus graph, be able to identify potential GDP, real GDP, and recessionary gap. Refer to Figure 16.2.
Page 405
What is the standard view in economics with respect to tax cuts?
Page 415
What are transfer payments? Be able to identify examples. (Pg 397)
Social Security benefits, Medicare and Medicaid benefits, unemployment benefits, and other cash benefits.
Know the term: structural surplus or deficit. (Pg 403)
Structural surplus or deficit: the budget balance that would occur if the economy were at full employment.
What two parts of the government determine the federal budget? (Pg 396)
The President and Congress
What is the actual budget balance equal to? (Pg 403)
The actual budget balance equals the sum of the structural balance and cyclical balance.
Know the term: tax wedge. (Pg 409)
The gap created by a tax between what a buyer pays and what a seller receives. In the labor market, it is the gap between the before-tax wage rate and the after-tax wage rate.
The magnitude of the tax multiplier is ____ (smaller than/greater than) the magnitude of the government expenditure multiplier. (Pg 404)
smaller than
An increase in income taxes _____ (increases/decreases) employment and _____ (increases/decreases) potential GDP. (Pg 410)
decreases decreases
To close a recessionary gap, the government can _____ (increase/decrease) government expenditures and _____ (increase/decrease) taxes. (Pg 405)
increase decrease
Needs-tested spending _____ (increases/decreases) during recessions and _____ (increases/decreases) during expansions. (Pg 402)
increases decreases
An income tax cut _____ (increases/decreases) aggregate demand and _____ (increases/decreases) aggregate supply. (Pg 405)
increases increases
The supply-side effects of an income tax cut _____ (increase/decrease) potential GDP and _____ (increase/decrease) aggregate supply. (Pg 414)
increases increases
