Econ 101 Ch. 27 - Fiscal Policy

tax multiplier

The ratio of change in the equilibrium level of GDP to a change in taxes.

stimulus package of 2009

a $787B package of psending increases & tax cuts used to help the economy

crowding out

a decline in private expenditures (consumption, investment, net exports) as a result of an increase in gvt. purchases

when the fed gvt runs a budget deficit, the Treasury must _______ funds from investors by selling _________

borrow; Treasury securities

automatic budget surplus & deficits

can stabilize the economy: in recession, wages/profits fall, so taxes fall = automatic tax cut, so spending stays higher than it would've been. they also get transfer payments.

government purchases multiplier

change in equilibrium real GDP / change in government purchases

cutting the corporate income tax rate would ____ investment spending by ______ the return corporations get from new investments

encourage; increasing

crowding out may reduce the effectiveness of ______ fiscal policy by reducing _________ due to ________ interest rates

expansionary; AD; increased

if there is a recession, _________ fiscal policy will be used, which ______ gvt spending or ___ taxes, causing real GDP & price level to _____

expansionary; increases; cuts; rise

falling exports & rising imports mean that net exports are _______

falling

corporate income tax

fed gvt. taxing the profits earned by corporations

fiscal policy only applies to actions by the _________

federal gvt.

supply-side economics

fiscal policy actions that primarily affect the AS rather than AD (LR effects of fiscal policy that expand productive capacity of the economy & increase rate of economic growth)

since WWII, the fed gvt.'s share of total gvt. expenditures has ________

increased

a cut in taxes has a/an _______ effect on AD

indirect

what was the largest part of stimulus package tax cuts in 2009?

individual tax cuts

the actual change in real GDP resulting from an increase in gvt. purchases or a cut in taxes will be _____ than indicated by the simple multiplier effect with a constant price level

less

consumer's permanent income

reflects the consumer's expected future income - may borrow more in the present even if they aren't making a lot

when the dollar increases in value, prices of US products in foreign countries ________, causing a __________ of US exports, & the prices of foreign products in the US to ______, causing a/an ___________ in US imports

rise; reduction; fall; increase

in the LR, crowding out declines investment, consumption & NX exactly to offset the increase in gvt purchases, & AD remains ___________

unchanged

cyclically adjusted budget deficit or surplus

what economists look at to get a more accurate measure of the effects on the economy of the gvt's spending & tax policies. It's the deficit or surplus in the fed gvt's budget if teh economy were at potential GDP

sole proprietorships

what many small businnes are - profits are taxed at the individual income tax rates.

what's the difference between gvt. purchases & gvt. expenditures?

with purchases, the gvt. gets a good/service in return. expenditures include purchases plus all other fed. gvt. spending

Fiscal Policy

changes in federal taxes & purchases that are intended to achieve macroeconomic policy objectives

most fiscal policy actions that attempt to increase AS do so by _________ to increase the incentives to work, save, invest, & start a business

changing taxes

an expansionary fiscal policy does not have to cause _______ crowding out in the SR

complete

what is the LR effect of a permanent increase in gvt. spending?

complete crowding out

if there is rising inflation, _______ fiscal policy will be used, which ______ gvt. spending or ____ taxes, causing real GDP & Price level to ______

contractionary; decreases; raises; fall

dividends

corporations distribute some of their profits to shareholders in the form of these payments

what did economist advise Bush to do in 2008 w/ the housing crisis, credit crunch, rising oil prices going on? what form did it take?

cut taxes to increase household disposable income to increase consumption spending & AD. the tax cut took the form of rebates of taxes already paid.

contractionary fiscal policy

decreasing gvt. purchases or increasing taxes

an expansionary fiscal policy should result in a cyclically adjusted budget ______, & a contractionary fiscal policy should result in a cyclically adjusted budget _______

deficit; surplus

an increase in gvt. purchases has a/an ______ effect on AD b/c gvt. expenditures are _______

direct; a part of AD

the _______ the sensitivity of consumption, investment, & NX to changes in interest rates, the __________ crowding out will occur

greater; more

Congress & the president carry out fiscal policy through changes in __________ & _____

gvt. purchases; taxes

if the economy is below potential GDP, it's possible for both gvt. purchases & private expenditures to ________

increase

if tax reduction & simplification are effective, the conomy will have _____ labor supply, saving, investment, & formation of new firms. Economic efficiency will also ______

increased; improve

when the economy is in a recession, ________ in gvt. purchases or ______ in taxes will increase AD

increases; decreases

the tax wedge applies to the ______ tax rate

marginal

the smaller the tax wedge for any economic activity, the _____ of that activity will occur

more

when the fed gvt. increases its purchases by $30B, the multiplier effect will increase AD by ______ than $30B

more than

when GDP increases above potential level, households/firms have to pay _________ taxes to the fed gvt, and the fed gvt makes ______ transfer payments. spending _____ less than it would have, reducing chance of ______ inflation

more; fewer; rises; higher

the tax multiplier is _________ b/c changes in taxes & real GDp move in _______ directions

negative; opposite

the fed gvt. is in ______ danger of defaulting on its debt b/c it can _______ funds it needs by through __________

no; raise; taxes

what are grants to state & local gvts?

payments made by the fed gvt to support gvt. activity at state & local level

what is interest on the national debt?

payments to holders of the bonds the fed gvt. has issued to borrow money

when the fed gvt. runs a budget surplus, the Treasury ________ some existing bonds

pays off

consumers base their spending on their ________ income, not just their _______ income

permanent; current

in the LR, the economy returns to _______________

potential GDP

when demand for money increases, equilibrium interest rate _______, causing a _______ in private expenditures (consumption, investment, NX) and ________ in exchange rate b/w the dollar & other currencies

rises; decline; increase

rising profits usually result in _____ stock prices & capital gains to shareholders

rising

capital gains

shareholders may benefit from higher corporate profits by getting these - they're the changes in the price of an asset (such as a share of stock)

the higher the tax rate, the ____ the amount of any increase in income that housheolds have to spend, which ______ the size of the multiplier effect

smalelr; reduces

the higher the tax rate, the _____ the multiplier effect

smaller

disposable income

the amount of income households have available to spend after paying taxes

tax wedge

the difference b/w the pretax & posttax return to an economic activity

marginal tax rate

the fraction of each additional dollar of income that must be paid in taxes

discretionary fiscal policy

the gvt. takes actions to change spending or taxes (tax cuts, for ex.)

multiplier effect

the series of induced increases in consumption spending that results from an initial increase in autonomous expenditures

budget surplus

the situation in which the gvt's expenditures are less than its tax revenue

a cut in tax rate affects equilbirium real GDP through 2 channels:

1. a cut in tax rates increases the disposable income of households, which leads them to increase their consumption spending 2. a cut in tax rates increases the size of the multiplier effect

why is it harder to get the timing right for fiscal policy than monetary? (2)

1. control over monetary policy is concentrated in the hands of the FOMC, which can change monetary policy at any of its meetings. But the President & a majority of Congress must agree on changes for fiscal - can take a while. 2. it takes time to implement fiscal policy. (time for construction, for ex.)

why do deficits automatically occur during recessions? (2)

1. during a recession, wages & profits fall, causing gvt. tax revenues to fall 2. the gvt. automatically increases its spending on transfer payments when the economy moves into recession

3 categories of fed. gvt. expenditures (other than purchases)

1. interest on the national debt 2. grants to state & local gvts. 3. transfer payments

automatic stabilizers

gvt. spending & taxes that automatically increase or decrease along with the business cycle - changes in these types of spending happen w/o actions by the gvt. (ex.-unemployment insurance payments)

how is gvt. spending measured realtive to the size of the economy?

gvt. spending is calculating as a percentage of GDP

what was the largest part of stimulus package spending in 2009?

health care, social services, & education

SR crowding out situation: gvt. decides to spend $30B on subway construction to fight recession. Income & real GDP will _________, causing households/firms to ________ their demand for currency & checking account balances to accommodate the increased buying/spending

increase; increase

discretionary fiscal policy can ________ the federal budget deficit during recessions by _____ spending or ______ taxes to ______ AD

increase; increasing; cutting; increase

a simplified tax code would ______ economic efficiency by ______ the number of decisions households & firms make solely to _____ their tax payments

increase; reducing; reduce

during recessions, gvt. spending ________ & tax revenues ______, __________ the budget deficit

increases; fall; increasing

lowering the tax rates on dividends & capital gains _______ the supply of loanable funds from households to firms, ____ saving & investment & _______ the equilibrium real interest rate

increases; increasing; lowering

expansionary fiscal policy

increasing gvt. purchases or decreasing taxes

a tax rebate is _____ to increase consumption spending less than a permanent tax cut would

likely

induced increases in consumption spending

occur b/c of autonomous increases in gvt. purchases

autonomous increases in gvt. purchases

occur b/c of gvt. decision; doesn't directly depend on level of real GDP

increases in gvt. purchases & cuts in taxes have a ________ multiplier effect on equilibrium real GDP

positive

Congress & the president can try to stabilize the economy by using fiscal policy to affect AD, which will change the ____________ & __________

price level; level of real GDP

when real GDP is below potential GDP, the economy is in a ___________

recession

reducing the marginal tax rates on individual income will _____ the tax wedge faced by workers, which will _____ the quantity of labor supplied & ________ new businesses to open

reduce; increase; encourage

budget deficit

the situation in which the gvt.'s expenditures are greater than its tax revenue

federal gvt. debt/national debt

the total value of US Treasury bonds outstanding - each year the fed budget is in deficit, the debt grows

goal of expansionary fiscal policy? (same as expansionary monetary policy)

to increase aggregate demand

why is contractionary fiscal policy used?

to reduce increases in AD that seem likely to lead to inflation

what is the largest & fastest-growing category of federal expenditures?

transfer payments