Ch. 11 Fiscal Policy Questions, Ch. 11 Fiscal Policy Vocab, Ch. 11 Fiscal Policy Videos
Assuming an upward sloping AS curve, to eliminate a recessionary gap, the increase in AD must be ___ than the size of the gap
larger
Suppose full-employment GDP occurs at $8 trillion. If the economy achieves a macro equilibrium at $7.2 trillion, then fiscal ___ (restraint/stimulus) is called for
stimulus
expansionary fiscal policy
stimulus to the aggregate demand: increase government spending or decrease taxes (politicans would prefer this because voters would prefer this)
The initial spending injection is less than
the size of tax cuts
16th Amendment (1913)
Authorized the collection of a progressive income tax. "Progressive" means as you make a higher income, you pay a higher percentage.
The use of gov't taxes and spending to altermacroeconomic outcomes is referred to as ___ policy
fiscal
How to get out of recession (Keynesian)?
get someone to spend more on goods and services
A dollar of tax cuts is less stimulative than a dollar of
government purchases
Aggregate demand includes
government purchases but not income transfers
Deficit
government spending greater than tax revenue (G>T)
IF AD shortfall is $100b and multiplier = 5, $___b is the desired change in gov't spending
$100b/5 = $20b
If gov't spending is $10b and the multiplier is 4, how much total change in spending can we expect
$10b * 4 = $40b
The federal gov't collects approx ___ in tax revenue each yr
$4 trillion
The total change in spending equals:
(multiplier) * (new spending injection)
The impact of fiscal stimulus on AD includes both
- new gov't spending - increases in consumer spending triggered by multiplier effects
Steps to formulate fiscal policty
- specify the amount of the desired AD shift - select the policy tolls needed to induce the desired shift
If initial change in consumption following a $400 billion tax cut is $320 billion, the economy's MPC must be ___
0.8
Multiplier
1/(1-MPC)
If the gov't seeks an int. increase in consumption of $420 billion and the economy's MPC is 0.6, then a tax cut of $___ billion is needed
420/0.6 = 700
What is the debt?
Accumulation of deficits
Fiscal Policy is
Gov gets $ from tax and debt, gov increase spending = shift aggregate demand (direct)
Which one of the following fiscal policty "packages" likely produces the most stimulus to the economy?
Higher purchases, higher transfers, lower taxes
The macroeconomic policies favored by the Trump administration are ___ in nature
Keynesian
Which believes economy is not self-regulating?
Keynesian
The initial fiscal stimulus resulting from an increase in transfer payments is equal to the transfer payment times the ____
MPC
initial increase in consumption =
MPC * Tax Cut
Income Transfers
Payments to individuals for which no current goods or services are exchanged, such as Social Security, welfare, and unemployment benefits.
The government can reduce taxes to shift the aggregate demand curve in which direction?
Right
A rightward AD shift equal to the real GDP gap will leave the economy
Short of full-employment GDP
Increases in which of the following will always accompany a recessionary GDP gap?
Unemployment
The fed gov't ability to tax incomes originated with
a 20th century amendment to the constitution
Crowding out
a decrease in investment that results from government borrowing
The amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes is the
aggregate demand shortfall
Other things equal, an increase in government spending will have what effect on an economy's aggregate demand curve?
cause it to shift out rightward
Fiscal policy
changes in government expenditures and taxation in order to achieve particular macroeconomic goals (maintain stable prices, low unemployment, high sustaining growth)
Which of the following are tools of fiscal policy
changes in tax rates, government purchases, changes in income transfers
Tax cut is used to increase both
consumption and saving
What policy should we use with a recessionary gap (equilibrium GDP > full employment level - low unemployment)?
contractionary policy
The gov't can __ taxes to make AD shift rightward
cut
During a recession, the gov't can __ taxes to increase consumption and shift the aggregate demand curve to the ___
decrease, right
Government Spending in AD
defense, highways, health care entails purcahses of real goods and services in product market
Every dollar of new government spending has a multiplied impact on aggregate
demand
Government spending directly impacts aggregate
demand
To achieve a $500b increase in total spending when MPC=0.8, the desired tax cut must be
desired tax cut = desired fiscal stimulus / MPC = 500/0.8 = $625b
GDP gap (AD excess)
equilibrium GDP down to full-employment GDP
What's wrong with this new equilibrium?
equilibrium output with AD2 < Qf. A rightward AD shift equal to the real GDP gap will leave the economy short of full employment
What policy should we use with a recessionary gap (equilibrium GDP < potential GDP - high unemployment)?
expansionary policy
Unemployment compensation and welfare payments are examples of ___ transfers
income
Disposable Income
income (after taxes) that is available to you for saving or spending
When AD cuvrse shifts to right, the economy moves up along the upawrd sloping AS curve, causing price levels to
increase
Tools of fiscal policy to stimulate the economy
increase in gov't spending and tax reductions
A tax cut contains less fiscal stimulus than an
increase in gov't spending of the same size
AD excess exceeds the
inflationary GDP gap
A tax cut must be ___(more/less) than a proposed increase in gov't spending to achieve the same amount of shift in the aggregate demand curve
more
As long as the AS curve slopes upward, we must increase aggregate demand by
more than the size of the recessionary GDP gap to achieve full employment
Every dollar of new government spending has a
multiplied impact on aggregate demand
The multiple by which an initial change in aggregate spending will alter total expenditure after an infinite number of spending cycles is the
multiplier
Monetary Policy is
printing money, central bank, Federal Reserve, buys debt to lend money, consumers borrow money (b/c lower interest rate) and spend it = stimulate economy (indirect)
3 Ways government can alter aggregate demand
purchasing more or fewer goods and services, raising or lowering taxes, changing the level of income transfers
Increased transfers
raises recipients' disposable income, and spending increases.•The effect is much like a tax cut since the recipients will save some of the payment.
An economy producing below full-employment output is considered to be operating in a
recessionary gap
contractionary fiscal policy
reduce aggregate demand: decrease aggregate spending or increase taxes
President Obama used ___ tool as a part of his 2009 stimulus package and again in 2011
tax cut
Fiscal stimulus
tax cuts or spending hikes intended to increase (shift) aggregate demand
Parts of Fiscal Stimulus of 2009
tax cuts, increased income transfers, increased government spending
A cut in transfer payments works like a
tax hike, reducing the disposable income of transfer recipients
Fiscal restraint
tax hikes or spending cuts intended to reduce (shift) aggregate demand
recessionary GDP gap
the amount by which equilibrium GDP falls short of full-employment GDP
AD shortfall
the amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes
Aggregate Demand (AD)
the amount of total spending on domestic goods and services in an economy
Fiscal policy
the use of government spending and revenue collection to influence the economy