macro fiscal policy

compare ability to pay back

why do we consider public debt as a percentage of gdp

decreased reliance on social welfare programs decreases government spending

in an expansion, government spending works as an automatic stabilizer by

information lag formulation lag

"Our fiscal policy was unsuccessful," an economic analyst says, "due to partisan bickering in Congress that delayed the passing of the appropriate measures and our failure to realize we were headed into recession until it was too late." What type of lags is the analyst describing?

shorten the formulation lag, but would not change the information lag or the implementation lag.

"The problem with democracy," your friend tells you as you debate politics, "is the time it takes to get approval for every action the government takes. If the president didn't have to spend so much time arguing back and forth with Congress, policy wouldn't take so long to affect the economy." This would:

very liquid assets the Fed uses to influence the economy through monetary policy

'Hard' money consists of:

taxation multiplier equation

-mpc/1-mpc=-0.2/1-0.2=-0.2/0.8=-.25

mpc=0.2

1.25

mpc=0.5

2

and the multiplier would be 1

If banks kept 100 percent of deposits on hand as reserves, the reserve requirement ratio:

Open-market operations

It's the major way the Federal Reserve System enacts monetary policy This tool is best for everyday monetary policy:

checkable deposits dollar bills money in checking account traveler's checks

M1 & M2

money in savings certificiate of deposit under 100,000

M2

national debt

National debt is the total of all deficits and surpluses over time. If the result is negative, the nation has debt; if it is positive, the nation is running an overall surplus. Therefore, in our calculations we must take care to make deficit and debt figures negative and surplus figures positive. We can set up our equation in the format National debt = (Sum of surpluses and deficits), using X as the amount of deficit or surplus for 2011: $-52 million = $286 million surplus + $-425 million deficit + $100 million surplus + X. Now we just solve for X, being careful about positive and negative values: $-52 million = $-39 million + X. X therefore equals $-13 million. Since the figure is negative, it's a budget deficit, so we can say that in 2011 Econo Nation ran a deficit of $-13 million.

were heavy and inconvenient to carry around

On the Yap Islands in the middle of the Pacific Ocean, giant stone wheels weighing as much as a small car were used as currency. Some of the likely problems with this currency were that they:

changing the reserves requirement

The central bank changes the amount of money banks must hold from their depositors

reserve requirements decrease discount rate decreases purchase of bonds in the open market increases

The economy is in recession and the Federal Reserve wants to increase the money supply. Should it increase or decrease the following?

The Federal Reserve's twin goals of price stability and full employment. The quote is focusing on full employment

The following quotation comes from remarks given by Ben Bernanke, chairman of the Federal Reserve: "The substantial ongoing slack in the labor market and the relatively slow pace of improvement remain important reasons that the Committee continues to maintain a highly accommodative monetary policy." Which part of the dual mandate does the quote refer to?

discount window policy

This tool goes through the Federal Reserve's role as lender of last resort A major disadvantage of this tool is that it requires that banks want to borrow from the Fed

changing the reserve requirement

This tool is good for emergency situations that require major, large-scale action Even if they aren't interested in buying, selling, or borrowing from the Fed, changes in this tool may inconvenience bank manager

a daily basis, doesn't inconvenience bank managers, and doesn't require banks to take loans from the Fed.

This tool is the best choice in most circumstances because it is done on:

unit of account

You calculate your net earnings for the year on your tax return

unit of account

You determine how much value your new lawn mower has added to your business:

medium of exchange

You pay your friend Cornelius $5 to help you mow lawns:

37.5

a. The marginal propensity to consume (MPC) = 0.2. The change in GDP is

150

a. The marginal propensity to consume (MPC) = 0.5 The change in GDP is

600

a. The marginal propensity to consume (MPC) = 0.8. The change in GDP is

people spend rather then save people expect tax cuts to be permanent

after taxes, but not spending, are cut, Ricardian equivalence fails to hold when

as people earn more, they pay more in taxes. this slows spending

automatic stabilizer

not be able to create new money.

banks would

Money contributes to economic activity and allows for a more complex society than barter does because

barter is inefficient. Each time you want to make a trade you have to find a partner who has something you want and wants what you have to offer.

right left

in a recession, auto stabilizers shift the AD curve to the ____. During expansion, auto stabilizer shift the AD curve to the ____.

increases 300 mill

consumers save 25 cents of each dollar of after-tax income and the government decreases taxes by 100 million. Gdp will____by____

2.86

consumers spend 65 cents of each add dollar of after-tax income. the government spending multiplier equals.

increases by 566.67

consumers spend 85 cents after-tax income and government decreases taxes by 100 million. gdp

fewer public works projects, lower transfer payments, and less money available for households to spend

debt reduction will result in:

deficits increase as spending rises and revenues fall

during a recession, government often pursues expansionary fiscal policy. how does this affect budget balances

tax increases government spending cuts

during recession, tax cuts today are often countered by ______ in the future

fiscal policy that involves changes in government spending affects

investment spending government spending household consumption

gdp increases by 600 mill

mpc=0.75 government reduces taxes by 200$ mill. what is the effect on gdp

policy-makers lack information needed

reason why fiscal policy is not always the best method to stabilize the economy

increase 400 million

suppose households spend 75 cents of each dollar of after-tax income. if the government spends 100 million on goods and services, gdp will___ by____

6.67

suppose that consumers spend 85 cents of each dollar of after-tax income. the government spending multiplier equals

open market operations

the central bank buys government securities from the bank

discount window policies

the central bank raises the cost of borrowing money:

the overall money supply of changes in 'hard' money

the multiplier determines the effect on

implementation may come to late the economy might self-correct during the lag

the reason for a gap between fiscal policy decisions and and the actual effect on those policies

tax cuts because this policy does not require borrowing which can push up interest rates

to stimulate an economy that is highly susceptible to the crowding-out effect, it would be more advisable to use:

If in some year a nation's budget deficit is $9.54 trillion and government spending is $12.21 trillion, how much must it have earned in tax revenue this year?

2.67 trillion in tax revenue

No. Government spending can result in crowding out which drives up interest rates and discourages spending in other parts of the economy

Is everything else equal in practice?

gives the government the flexibility to respond to economic conditions by changing its spending pushes the burden of the debt onto future generations. must be repaid, causing government interest payments. can cause crowding out which increases interest rates.

Is government debt good or bad for the economy and the nation as a whole? Government debt:

surplus at least as large as the deficit

It is possible for a nation's government to run a budget deficit in some years but not have national debt if the economy initially had a(an)

reduce the cost of borrowing limit the flexibility of the govt engaged in expansionary fiscal policy force the govt to cut back on its spending

Taxpayers are clamoring for their government to be more responsible and many strongly support a balanced-budget amendment. This would mean the country could no longer spend more than it takes in each year. A balanced-budget amendment will:

Contractionary fiscal policy aggregate demand will shift to the left

The economy is growing far too quickly, as high aggregate demand is causing inflation. a. What fiscal policy should be pursued in this instance? b. what will be the effect of the appropriate policy on aggregate demand?

Expansionary fiscal policy that will shift aggregate demand to the right

The government decides to fill gaps in Medicare by making it available to more people.

has a stable value and is convenient

Throughout time, metals such as gold have been popular choices for money across various societies. This is because gold:

Run lower deficits.

You hear on the nightly news that the president has vowed to decrease the nation's debt. "Both the government and private citizens will have to buckle down and learn to do without," he says. In order to reduce its debt, a nation must:

medium of exchange

You swipe your debit card to purchase gasoline for your lawn mower:

actual gdp is less than potential gdp

effect of contractictory fiscal policy that reaches the economy so late that the economy has already self-corrected

gdp increases by 357.14

effect on gdp of a 125 mill increase n government spending when the mpc=0.65

increase reliance on social welfare programs increase government spending

in a recession, how does government spending work as an automatic stabalizer

automatic stabilizers

in the u.s., the income tax system is progressive. that is, the more we earn, the higher tax rate we face.

negative number

when taxes increase(decrease), gdp decreases (increases). therefore the taxation multiplier is a

Expansionary fiscal policy designed to increase the aggregate demand curve This could happen if the formulation lag and the implementation lag exceeded the recession.

Assume that the government in some nation intended to respond to low employment via fiscal policy.

a. expansionary b. to the right c. consumption, government spending and investment

Assuming that unemployment is high and spending is low, answer the following questions. a. Should the government pursue expansionary or contractionary fiscal policy?' b. What will the appropriate policy do to the aggregate demand curve? Will it shift to the right or to the left? c. Through which component(s) of aggregate demand (Consumption, Investment, Government Spending, or Net Exports) will the change occur?

Contractionary Fiscal Policy

Best fiscal policy for a country with high inflation - because it increases taxes or decreases spending

this tool is powerful and makes it difficult for bank managers to plan for the future and manage funds as they like.

Changes in reserve requirements to conduct monetary policy is generally not a good idea for the United States because:

The increase in government spending, which affects GDP and income directly, will have a bigger effect than the decrease in taxes, which must go through consumption to affect GDP

Everything else equal, which will have a bigger effect on aggregate demand and GDP: a $100 million reduction in taxes, or a $100 million increase in government spending?

It would still carry indirect costs of higher market interest rates due to a higher volume of borrowing

If the government could borrow as much as it liked with a 0 percent interest rate, would the government debt be cost-free

it would still carry indirect costs of higher market interest rates due to a higher volume of borrowing.

If the government could borrow as much as it liked with a 0 percent interest rate, would the government debt be cost-free?

contractionary fiscal policy which includes a reduction in government spending by less than $500 million.

If the government wants to slow down the economy by reducing GDP by $500 million, the most appropriate action is:

Expansionary fiscal policy, which includes increases in government spending or decreases in taxes, that will shift AD to the right

If unemployment is high and spending is sluggish, what type of fiscal policy should be enacted?

vertical, reflecting the assumption that the Federal Reserve completely controls the supply of money. This assumption is: not very accurate

In the liquidity-preference model the slope of the money supply curve is:

has shorter lags than fiscal policy, so monetary policy may impact the economy more quickly than fiscal policy

In the short-run aggregate demand and supply model, one important difference between monetary and fiscal policy is that monetary policy:

has a dual mandate: full employment and stable prices; whereas the European Central Bank focuses only on price stability

One key way in which the mission of the Federal Reserve differs from the mission of the European Central Bank is that the Federal Reserve System:

lower government spending and the deficit, but would also reduce economic activity which is already too low due to the recession

President Obama said the following in November of 2010 when announcing a two-year pay freeze for civilian federal employees: "After all, small businesses and families are tightening their belts. Their government should too." This response would:

left with contractionary monetary policy, increasing the interest rate and lowering the equilibrium quantity of money

Using the liquidity-preference model, the Federal Reserve can react to the threat of exceedingly high inflation via monetary policy by shifting the supply of money to the:

reduced through fiscal policy, but tax revenues automatically change without government action.

When counteracting a recession, tax rates should be:

moved assets from savings to checking.

When depositors change the way they hold assets this could increase the M1 measure of the money supply while leaving M2 unchanged if depositors:

members of the Board of Governors serve long terms and are not elected by popular vote

When we say that the Federal Reserve System is politically independent we mean that the:

Increased interest rates. Increased taxes or lower spending in the future.

Which of the following are examples of the negative effects associated with government debt?

store of value

You stuff your earnings from mowing lawns into a piggy bank:

increase

during recessions, budget deficits tend to

implementation, information, and formulation lags

expansionary fiscal policy. by the time the fiscal policy's effects reach the economy, it's already corrected itself.

66.67 billion

gdp is 14 trillion, potential gdp is 14.2 trillipn, mpc = 0.75 enact a policy that brings the eco into long-run equilibrium. the government would need to decrease taxes by

purchases and transfer payments

government expends money through

taxes

government gains revenue from

budget surplus

government spends less than it brings in tax revenue

1/(1-mpc)

government-spending multiplier

Tax rates

percentage of income that is taxes whereas, tax revenues refer to the dollars collected by the government in taxes.

taxation multiplier

tells us the amount gdp decreases when taxes increase by one dollar

Marginal Propensity to consume (MPC)

the increase in consumption that results from one additional dollar of after-tax (disposable) income.

-1.86

when mpc=0.65 the taxation multiplier equals

the bank would quickly find itself unable to meet its customers' liquidity needs and would not be in business long.

A bank keeping a reserve ratio of zero would be a very bad idea because:

not valid, because the debt can be high even when the deficit for an individual year is small.

A friend of yours looks at the state of the U.S. debt in 2011 and tells you, "Since the debt is so high, we must be running an incredibly large deficit every year." Your friend's analysis is:

Contractionary fiscal policy that will shift aggregate demand to the left

The government raises taxes on households making more than $250,000.

He is right in the sense that when the government spends more than it brings in, it must borrow to fund the rest The government has an almost unlimited capacity to borrow by issuing Treasury bonds. Some borrowing is intragovernmental borrowing, in which the government uses money from other accounts.

The government shouldn't borrow so much," your uncle claims. "Look at that national debt! It's no different from someone borrowing on credit cards they can't pay." a. Is your uncle right? How is government debt spending different from someone borrowing on a credit card?

Contractionary fiscal policy that will shift aggregate demand to the left

The government slashes funding for the Environmental Protection Agency, without changing any other spending.

open-market operations.

The monetary policy used most frequently by the Federal Reserve System is:

interest rates and the change in the equilibrium quantity of money

Under the liquidity-preference model, when the money supply changes, the slope of the money demand curve will influence the change in

-3

when consumers spend 75 cents of after tax income, taxation multiplier equals

This is possible if the government financed its debt by engaging in intragovernmental debt

"Though the national debt has increased, don't worry," the president says in a televised speech. "We will not have to pay these funds back to bond buyers." How is this possible? How must the government have financed its debt in this case?

increase by 240 million

75 cents of after tax-income. government spends 60 million on goods and services, gdp will

mpc=0.8

5

tax revenues fall as unemployment rises, and income falls

typically, during a recession

The Red Cross

During World War II, millions of soldiers were captured and sent to prisoner-of-war (POW) camps. Prisoners began to use cigarettes as a common currency. A simple system of exchange with standardized prices developed: Tins of food could be bought for a set quantity of cigarettes, soap for another quantity. There was a fairly stable supply. Cigarettes came into the camps in shipments of food and other supplies from the humanitarian agency the Red Cross and were distributed among the prisoners. Sometimes, though, there would be a sudden influx of cigarettes—say, if the Red Cross managed to send an extra shipment one week. Soldiers, flush with cigarettes, would go on spending sprees. Soldiers would outbid each other to get the things they wanted, sending prices skyrocketing. Soldiers would then need a lot more cigarettes to buy a bar of soap. If the Red Cross missed a few shipments, though, there would be a steady decrease in the number of cigarettes in circulation, since prisoners smoked them too. Prices would plummet, and overall economic activity fell, as trading slowed to a halt." Who played the role of the central bank?

higher than expected because the multiplier is higher than expected, which push up output and employment beyond full-employment levels, causing inflation.

Let's say the government estimates that the average household spends 80 percent of each additional dollar of income and uses this estimate to determine the amount it needs to increase government spending to stimulate the economy by a given dollar amount. In reality, however, households actually spend 90 percent of each additional dollar of income. In this case, an expansionary fiscal policy implemented through changes in government spending will be:

decreased economic activity. Since fewer people have been employed, overall incomes fell, bringing down tax revenues and increasing budget deficits

Since 2007, budget deficits in the United States have been so high because there has been