Chapter 16: Fiscal Policy

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The multiplier effect is only a consideration for increases in government purchases. (T/F)

False

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

Fiscal Policy

The federal government efforts to keep the economy stable by increasing or decreasing taxes or government spending.

When is it considered​ "good policy" for the government to run a budget​ deficit?

When borrowing is used for ​ long-lived capital goods.

In the long​ run, increases in government purchases result in:

complete crowding out.

​One-time tax​ rebates, such as those in 2001 and​ 2008, increase consumption spending by less than a permanent tax cut because​ one-time tax rebates increase

current income

Each year that the federal government runs a​ deficit, the federal debt ______

grows

According to the multiplier effect, an initial decrease in government purchases decreases real GDP by _____ the initial decrease in government purchases.

more than

Each year that the federal government runs a​ surplus, the federal debt

shrinks

The higher the tax​ rate, the __________ the multiplier effect.

smaller

What is the difference between federal government purchases​ (spending) and federal government​ expenditures?

Government purchases are included in government expenditures.

Does government spending ever reduce private​ spending?

​​Yes, due to crowding out.

Policy that is specifically designed to affect aggregate supply and increase incentives to​ work, save, and start a​ business, by reducing the tax wedge is called:

​​supply-side economics

What are the gains to be had from simplifying the tax​ code?

1) Increased efficiency of households and firms. 2) Greater clarity of the decisions made by households and firms. 3) Resources from the tax preparation industry freed up for other endeavors. ANSWER: All of the above.


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