ch17 econ
what has a more powerful effect on the economy
changes in government purchases have a more powerful effect on the economy than equal-sized changes in taxes or transfers
multiplier is effected by
changes in government transfers and taxes
an example of an automatic stabilizer is
tax receipts rising when GDP rises.
government's deficit
tends to increase during a recession
examples of government subsidies
welfare, farm subsidies, social security, medicare/medicaid
to close an inflationary gap with fiscal policy, the government could
reduce budget allocations to interstate highway maintainence
austerity
sharp cuts in spending plus tax increases
when the government borrows funds to pay for budget deficits
private investment spending may be crowded out
Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, it is in a(n)
recessionary gap
discretionary expansionary fiscal policies
reduce the budget balance for that year
the fact that tax receipts fall during a recession
reduces the adverse effect of the initial fall in aggregate demand.
when the economy expands, income tax receipts will
rise, and sales tax revenues will rise
the national debt ___ when the federal government incurs a ___
rises, deficit
MPC
marginal propensity to consume
MPS
marginal propensity to save; aggregate raise in income that consumer saves rather than spends
what could rising debt lead to
government default, which would result in economic and financial turmoil
multiplier equation
1/(1-MPC) or 1/MPS (marginal propensity to save)
expansionary fiscal policy includes
increasing government expenditures
contractionary fiscal policy includes
increasing taxes
if the economy is at equilibrium above potential output, there is a (n) ____ gap, and ____ fiscal policy is appropriate
inflationary; contractionary
lags in fiscal policies
it takes time to create these
the government has a budget surplus if ___ expenditures
its revenues are greater than
when MPC gets smaller...
multiplier gets smaller as well (and VV)
the largest source of federal tax revenue is
personal income taxes
GDP equation
GDP = C + I + G + (X-M)
budget deficit
negative budget balance
debt
sum of money a government owes a particular time
recovery act
American recovery and reinvestment act
why can't a government just print more money
INFLATION
why will debt rise in a recession
because the government is trying to spend more
what can the federal government do to finance a deficit
borrow funds
fiscal policy that decreases aggregate demand is
contractionary
suppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will ___ the ____ effect of the ____ in aggregate demand
decrease; expansionary; increase
when the economy is in a recession, tax receipts ____ and unemployment insurance payments ____
decrease; increase
contractionary fiscal policy
decreases aggregate demand through. reduction in government purchases, increase in taxes, a reduction in government transfer
unfunded manadte
fluctuations in the budget balances are due to the effects of the business cycle
how are debts and deficits linked?
government debt grows when government run deficit
ways to get out of debt
government raises taxes, government stops spending (at least not as much)
the national debt
grows when government runs a deficit
persistent budget deficits
have long-run consequences because they lead to an increase in public debt
spending promises made by the government that are effectively a debt, although they are not included in the usual debt statistics, are known as
implicit liabilities
if the average retirement decreases
implicit liabilities will increase
philosophies on balancing the budget
should we require an annually balanced budget (we would lose the ability to help during a recession) AND should we balance the budget over the business cycle on average (and trust the politicians to keep the long-run budget healthy? NO)
which of the following is a government transfer?
social security payments to retired auto workers
government purchases
social security, defense, education are large in this category
implicit liabilities
spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics
if the government's revenues are greater than its expenditures, then it has a budget:
surplus
when the unemployment rate decreases, the budget
surplus gets larger or the deficit gets smaller
medicare covers much of the cost of medical care for Americans with low incomes
FALSE
when faced with a recessionary gap, the government can increase taxes and cut spending to close it
FALSE
in the basic equation of national income accounting, GDP = C + I + G + X - IM, the government directly controls _____ and influences _____ through fiscal policy
G; C and I
Sgovernment (government saving/surplus)=
T-G-TR; Tax revenues - the Government purchases - TRansfers
budget surplus
a positive budget balance
which of the following is NOT an example of government transfers?
a reimbursement of personal income tax withheld from wages
an inflationary gap occurs when
actual output exceeds potential output
government transfer payments rise when the economy is contracting and fall when the economy is expanding. In this role, transfer payments are described as:
automatic stabilizers
changed in taxes and government transfers shift the aggregate demand curve ___ government purchases
by less than
some argue that budget deficits will lead to reduced private spending because
consumers, anticipating paying higher taxes in the future, will reduce current consumption in order to save money to pay the future taxes.
discretionary fiscal policy
deliberate actions by ploy rather than rules (ex. Obama stimulus), where the government will actually do something and create a bill
deficit
difference between the amount of money a government spends and the amount of money it recieves in taxes over a period of time
If the marginal propensity to consume is 0.75 and government purchases of goods and services decrease by $30 billion, real GDP will:
decrease by $120 billion
if the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to ___, which will shift the AD curve to the ____
decrease government purchases; left
a contractionary fiscal policy either ____ government spending or ____ taxes
decreases, increases
the federal budget tends to move toward ___ as the economy ____
deficit, contracts
Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the government should ___ aggregate demand by ____ taxes to close the ___ gap
expand; cutting; recessionary
Fiscal policy that increases aggregate demand is
expansionary
the effect of a government deficit is
expansionary
a recessionary gap can be closed with
expansionary fiscal policy
the decision to build more aircraft carriers to keep employment high is an example of
expansionary fiscal policy
Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the government should use ___ fiscal policy to shift the aggregate demand curve to the ____
expansionary; right
a change in government transfers shifts the aggregate demand curve by more than a change in government spending for goods and services and has a larger effect on real GDP
false
the budget deficit usually decreases when the unemployment rate increases
false
automatic stabilizers
fiscal policy that causes the economy to be expansionary when it contracts and contractionary when it expands
social security spending is projected to
increase as baby boomers retire
if the actual output lies below potential output, then an appropriate fiscal policy would be to ____, which will shift the ____ curve to the _____
increase government purchases; AD; right.
a government surplus is contractionary because ___ are contractionary
increase in taxation
Look at the figure Short- and Long-Run equilibrium. If the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output is a(n):
increase in transfer payments
discretionary contractionary fiscal policies
increase the budget balance for that year
budget deficits almost always
increase when unemployment increases and fall when unemployment falls.
expansionary fiscal policy
increases aggregate demand
expansionary fiscal policy def
increases aggregate demand through an increase in government purchases, a cut in taxes, and an increase in government transfers; can help to close a recessionary gap; helps to STIMULATE economy
all of the following are sources of federal tax revenue except
sales taxes
governments efforts to stabilize the business cycle through fiscal policy can destabilize the economy because of
the time necessary to draw up a budget appropriate to the circumstances
medicaid, medicare, and social security are examples of
transfer payments
medicaid, food stamps, and sales taxes are all automatic stabilizers
true
one of the lags associated with fiscal policy is the time it takes to recognize that the economy has developed a recessionary or inflationary gap
true
the size of the multiplier increases as the size of the marginal propensity to consume increases
true
taxes increase as gdp rises. this is an example of an automatic stabilizer
trye
the multiplier effect of an increase in transfer payments is smaller than that of an equal increase in government purchases of goods and services because some of the transfer payment is likely to be saved
trye
fiscal policy
use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve
discretionary fiscal policy entails
using government spending or tax policy to affect aggregate demand