Chapter 13 review questions

may occur with government deficit spending. may increase the interest rate and reduce private spending which weakens or cancels the stimulus of fiscal policy

"crowding out"

built in stability arises bc?

arises bc net taxes change with GDP it is desirable for spending to rise when the economy is slumping and vice versa automatic stability reduces instability, but does not eliminate economic instability

progressive tax system defined

as we make more income we pay higher taxes ( paying taxes at a higher rate)

what does expansionary policy create ?

creates a deficit but in hopes that we expand the economy

what does contractionary policy create

creates a surplus

how is public debt financed

is mostly financed through the sale of government bonds and bills

define fiscal policy

is the congress and the president deliberately deciding to change taxes in order to affect spending which will affect output and the growth of the economy and inflation

define public debt

is the total accumulation of the federal government's total deficits and surpluses that have occurred through time.

define expansionary policy

is used to combat a recession, is used to expand the economy in times of recession

built in stability happens bc of?

progressive tax system; bc of progressive tax system we have some built in stability

all the historical accumulation of debt, all added together, not just one year's debt

public debt

define built- in or automatic stabilization policy

the mechanism that increases government's budget deficit during a recession and reduces its deficit during an expansion without any action by policymakers. the tax system is one such mechanism

define "crowding out"

when the government uses expansionary (so increase government spending) but where are they going to get the money? they will borrow it. the government borrowing money for this expansionary policy causes an increase in interest rates causing consumers and business not spending as much so in the end was counter productive.

which policy? to reduce the size of the government

- if recession, then decrease taxes -if inflation, then decrease government spending

contractionary policy effect on AD

-GDP needs to decrease from AD4 to AD3 (so by 12) - multiplier is 4 - 12/4 = $3bil - we need to decrease spending by 3 bill - or we can increase taxes by more than 3 bill -why? some reduction in spending and some in savings - MPC= .75 - 3/ .75 = 4 bill - increases taxes by 4bill

which policy ? to expand the size of the government

-if recession, then increase government spending - if inflation, then increase taxes

define contractionary fiscal

-when demand- pull inflation occurs, contractionary policy is the remedy. -is used to contract the economy by decreasing spending

how to decrease spending for contractionary fiscal policy

1. decrease government spending 2. increase taxes - individuals will have less to spend 3. combination of both- decrease GS and increase taxes

3 ways to increase spending for expansionary policy

1. increase government spending - we can just increase spending directly 2. decreases taxes- decrease taxes for consumers and/or business -> decrease in taxes gives people more room to spend more money 3. combination of both- some increase in government spending, some decrease in taxes so that more spending will be happening in both areas

define the timing problems with fiscal policy

1. recognition lag- by the time we recognize that we need government intervention, we are behind 2. administrative lag- the difficulty between congress and the president in changing the problem once the problem has been recognized 3. operational lag- is the time elapsed between the change in policy and its impact on the economy

expansionary effect on AD model

5 bill increase in government spending expands AD right to dashed curve. the multiplier then magnifies initial increase in spending to solid line. real GDP rises to 20 billing (formula) increase in spending x multiplier = increase in GDP (multiplier = 4) 5 x 4 = 20

effect of feral budget as a result of contractionary policy

Contractionary fiscal policy leads to a smaller government budget deficit or a larger budget surplus

effect of feral budget as a result of expansionary policy

Expansionary fiscal policy leads to a larger government budget deficit or a smaller budget surplus.

how do we use expansionary policy?

if we want to expand economy we need to increase spending - 3 ways

(discretionary) fiscal policy refers to changes in what? which is designed to do what?

deliberate changes in taxes and government spending by congress to achieve full employment, control inflation, encourage economic growth

with progressive tax system, we have some built in stability. at lower levels on income..

government collects lower taxes. this is desirable and helps reduce the slump of the economy but in itself not enough to correct a recession (its just some built in stability)

describe what is meant by a political business cycle

may destabilize the economy. sometimes politicians like to use expansionary fiscal policy to get re-elected even though the economy doesn't call for it

who are the major holders of the US debt

owned to the holders of US securities - treasury bills (short- term securities) - treasury notes (medium- term securities) -treasury bonds (long-term securities) - US savings bonds (long term, non-marketable securities)