Chapter 10 Fiscal Policy

discretionary spending.

-When the government conducts activist fiscal policy, what type of spending does it usually use? -Spending on programs that congress authorizes on an annual basis is known as -defense spending (ex.)

An increased federal budget DEFICIT during a recession serves as an automatic economic stabilizer because:

-increased transfer payments from unemployment insurance partly offset the fall in household income. -lower personal income translates into a lower tax load and so consumption spending declines slightly less, -lower corporate profits translates into a lower tax load and so investment spending declines slightly less.

An increased federal budget surplus during an expansion serves as an automatic economic stabilizer for what reasons?

-reduced transfer payments from welfare programs partly offset the overall increase in household income. -higher personal income translates into a higher tax load and so consumption spending is slightly curbed. -higher corporate profits translate into a higher tax load and so investment spending is slightly curbed.

The Kennedy administration endorsed substantial tax cuts because:

-tax rates were very high compared to tax rates today. -the economy was considered to be below its full employment level. -the unemployment rate was considered to be above its natural rate.

Federal budget surplus occurs when the government spends ____ than it collects in taxes

Less

What is the reason that stabilization policies do not have an immediate effect on an economy?

There is a time lag for policies to take effect.

Federal discretionary spending consists of:

all the programs authorized by Congress on an annual basis.

entitlement and mandatory spending consist of:

all the spending that congress authorized by prior laws.

The government strives to operate at neither a deficit or surplus budget in order to keep the federal budget ________.

balanced

In a situation where the government is operating on a budget surplus, it can reduce its overall debt by ________.

buying back bond its has sold to the public.

According to economic studies, the 2001 tax rebates under the presidency of G.W. Bush did not increase aggregate demand because:

consumers saved, instead of spending, the rebates.

A reduction in government expenditure or an increase in taxes is defined as:

contradictory fiscal policy

Policies aimed to REDUCE level of GDP are:

contradictory policies

Government policies that DECREASE aggregate demand are called:

contradictory policies.

In order to increase the aggregate demand curve, a government must _______ spending and _______ taxation.

decrease; increase

An increase in the personal income tax rate ________ disposable income which _______ consumption.

decreases; decreases

The largest category of federal spending is:

entitlements and mandatory spending.

Government fiscal policies can be used to affect aggregate demand and help stabilize and economy. What are they?

expansionary and contradictory

Policies aimed to INCREASE level of GDP:

expansionary policies

Federal spending consists of:

federal government purchases and transfer payments

Which component of federal spending is included in GDP?

government purchases.

What are two "tools" governments can use to affect the level of aggregate demand?

government spending and taxation

Increases in government spending or decreases in taxes will _______ the aggregate demand.

increase

In order to decrease the aggregate demand curve, a government must _____ spending and ______ taxation.

increase; decrease

According to supply-side economics, a decrease in tax rate tends to ________ the labor supply and ______ aggregate output.

increase; increase

The largest category of federal revenue is:

individual income taxes.

The time it takes to formulate a policy is known as:

inside lags

the fact that it takes time for a government to take action even after a problem has been diagnosed, is one og the reasons for the occurence of:

inside lags

Net interest spending consists of:

interest payments on government debt held by the public.

tax cuts aimed at businesses can stimulate:

investment spending

When the federal government runs a budget deficit:

it borrows money from the public by issuing bonds

The federal government runs on a budget deficit when:

it spends more than it receives in tax revenues

Automatic stabilizers

minimize fluctuations in the economy.

the time it takes for a policy to actually work is known as:

outside lags

Policies taken to move the economy closer to potential output are called:

stabilization policies

Stabilization policies are policies:

taken to move the economy closer to potential output.

The Laffer curve shows relationship between:

tax rates and tax revenue

Expansionary policies are policies:

that aim to increases the level of GDP.

What is the reason that stabilization policies do not have an "immediate" effect on an economy?

the lag time for policies to take effect.

The tax surcharge enacted during the early years of the Vietnam War failed to decrease consumer spending because:

the tax surcharge was only temporary.