Macro Chapter 9: The Government and Fiscal Policy

Government spending incs by $40 billion and equilibrium level of output incs by $200 billion. Govt spending multiplier =

$200 billion/ $40 billion = $ 5 billion

Tax Multiplier

- (MPC/ MPS) the ratio of change in the equilibrium level of output to a change in taxes

If the MPC is 0.5, the tax multiplier is

-1 bc if MPC = 0.5, MPS= 1 - 0.5 = 0.5 tax multiplier = -(MPC/MPS) therefore tax multiplier = -(0.5)/(0.5) = -1

Why the AS curve slopes upward in the short-run?

-INCREASE in overall level of prices in economy: tends to RAISE the quantity of good & services supplied -DECREASE in level of prices: tends to REDUCE quantity of goods & services required

monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates. Federal Reserve controls this

automatic stabilizers

Taxes and transfer payments that stabilize GDP without requiring policymakers to take explicit action. When aggregate demand decreases, two actions kick in automatically. First, income taxes will go down because the amount of income has decreased. At the same time, transfer payments like unemployment compensation and welfare benefits will increase. As a result, consumption will not decrease by as much as it would have.

privately held federal debt

The privately held (non-government-owned) debt of the U.S. government. ex: fed reserve, social security trust fund, etc

When the government sector is included in the income- expenditure model, the equation for aggregate income is _____________.

Y = C + I + G

Relationship among Govt Purchase (G), Net Taxes (T), and Disposable Income (Yd)

Yd = C + S Y - T = C + S Y = C + S + T AE = C + I + G

Is depreciation a planned investment?

Yes

federal budget

a plan for the federal government's revenues and spending for the coming year

federal debt

all the money borrowed by the federal government over the years and still outstanding govt owes this

proggresive tax

avg tax rate increases when income

The Social Security Tax is an example of a: a. progressive tax b. regressive tax c. proportional tax d. excise tax

b. regressive tax

In a recession, the govt should: a. decrease aggregate demand by increasing taxes b. increase aggregate demand by decreasing purchases c. increase investment by decreasing taxes d. increase investment by raising taxes

c. increase investment by decreasing taxes

Suppose that in the beginning of 2016 the federal debt was $11 trillion and at the end of 2016, the federal debt was $11 trillion. During 2016, a. the budget deficit was zero b. the govt balances its budget c. the budget surplus was zero. d. all of the above.

d. all of the above

Depreciation

decline in asset's value over time

-Taxes vary (directly/indirectly) with GDP -transfers vary (directly/inversely) with GDP

directly; inversely

federal surplus (+) or deficit (-)

federal government receipts minus expenditures

How is deficit created?

inc govt spending and decreases taxes (specifically a combination of both)

disposable income

income (after taxes) that is available to you for saving or spending Yd = Y -T (total income minus net taxes) (3 equals signs) aka After-tax income

if the government wants to reduce unemployment, govt purchases should be __________ (increased/decreased) and/or taxes should be ________________ (increased/decreased).

increased; decreased

automatic destabilizers

revenue and expenditure items in the federal budget that automatically change with the state of the economy in such a way as to destabilize GDP fiscal drag - a negative effect that occurs when avg tax rate incs bc taxpayers are moved to higher bracket during expansion

What is the federal budget a product of?

social, political, economic forces

Why can tax changes be non-discretionary ?

tax rates might remain same but during recession--> earn less $$, pay less taxes

net taxes

taxes paid by firms and households to the government minus transfer payments made to households by the government

proportional tax

the average rate of tax is constant regardless of income level

cyclical deficit

the deficit that occurs because of a downturn in the business cycle

structural deficit

the deficit that remains at full employment

balanced budget multiplier

the ratio of change in the equilibrium level of output to a change in government spending where the change in government spending is balanced by a change in taxes so as not to create any deficit. ALWAYS EQUAL TO 1: change in Y resulting from change in G and equal change in T is exactly the same size as initial change in G or T Y = G/T = 1

government spending multiplier

the ratio of the change in the equilibrium level of output to a change in government spending 1/ MPS = 1 / (1-MPC)

contractionary fiscal policy

use during demand-pull inflation Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.

full employment budget

what the federal budget would be if the economy were producing at the full-employment level of output

What percent of the bottom of income earners receive more govt spending than they pay in taxes ?

40%

regressive tax

A tax for which the percentage of income paid in taxes decreases as income increases

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

discretionary fiscal policy

Changes in taxes or spending that are the result of deliberate changes in government policy.

Difference between fiscal and monetary policy?

Fiscal is the tax and spending programs of the government Monetary Policies are what the FED and the Govt use to reach their financial goals

fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending.

Do we want to increase or decrease consumption during recession?

Increase consumption - Inc govt spending, dec taxes

If output exceeds aggregate expenditure, there will be an unplanned _____________(inc/dec) in inventories. Actual investment will be ________(greater/less than) planned investment

Increase, greater

What happens to size of multiplier when we make more realistic assumption that taxes depend on income?

It's reduced

Why is multiplier principle incomplete?

Treats taxes as lump sum/ fixed amount when in reality taxes depend on income

Equation for determination of equilibrium output

Y = C + I + G