MEL 9

How does a budget defecit act as an automatic stabilizer and reduce the severity of a recession?

-Transfer payments to households increase -consumers spend more than they would in the absence of social insurance programs,like unemployment -during recessions, tax obligations fall due to falling wages and profits

In what ways does the federal budget serve as an automatic stabilizer for the economy?

During a recession there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall.During an expansion there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these occur automatically and both serve to stabilize aggregate demand.

If the SRAS curve were a horizontal line, what would be the impact on the size of government purchases and the tax multipliers?

The multiplier effects would be larger if the SRAS curve is horizontal rather than upward sloping. Compared with a horizontal SRAS, an upward sloping SRAS results in a smaller change in equilibrium real GDP for a given increase in government purchases or cut in taxes.

What is fiscal policy?

changes in government spending and taxes to achieve macroeconomic policy objectives

What is a contractionary fiscal policy?

decreasing government spending and increasing taxes in order to decrease aggregate demand

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

government purchases are included in government expenditures

What is an expansionary fiscal policy?

increasing government spending and decreasing taxes in order to increase aggregate demand

The higher the tax rate the _________ the multiplier effect.

smaller

Who is responsible for fiscal policy?

the federal government

The Caldecott tunnel in northern California and similar construction projects elsewhere in the country would be expected to help the economy in the short run because

the use of discretionary fiscal policy would create a multiplied increase in real GDP and employment

Why do few economists argue that it would be a good idea to balance the federal budget every year?

to keep a balanced budget during a recession, taxes would have to increase and government expenditures would have to decrease, which would further reduce aggregate demand and deepen the recession