Econ Chapter 15

no self adjustment

- Keynes asserted that the private economy was inherently unstable - The inherent instability of the marketplace required government intervention - Policy levers were both effective and necessary

what are the strengths of supply side fiscal policy?

- Lower taxes raise consumers' disposable income. - Higher income encourages workers to work more. - Lower taxes encourage firms to increase output. Weaknesses: - Lower tax revenues hurt government's operations.

what are some examples of mandatory spending?

- Social Security - Medicare - Medicaid

what are the 2 schools of economic thought?

- classical theory - Keynesian theory

to cool down the economy, the government can:

- decrease government spending - decrease transfer payments - increase taxes

to give the economy a boost, the government can:

- increase government spending - increase transfer payments - decrease taxes

what are some examples of discretionary spending?

- military - education - transportation

consensus and disagreement

- most economists agree that expansionary fiscal policy shifts the aggregate demand curve to the right - Problems with lags and politics make fiscal policy undesirable as the primary tool for stabilizing the economy - When market forces and monetary policy can't resolve an economic crisis, most economists support the use of fiscal policy - Most economist now agree that fiscal and monetary policy can affect the unemployment rate in the short run but cannot keep unemployment below the natural rate in the long run

the Keynesian revolution

- the great depression was a stunning blow to Classical economists - Keynes provided an alternative to the Classical theory - Keynes argued that the Great Depression wasn't a unique event - it would recur if reliance on the market to "self adjust" continued

what are some potential problems with fiscal policy?

- timing - politics - crowding out

what can cause pressure and complicate fiscal policy decisons?

- voters - firms - special interest groups - policy makers' own opinions

If Northland has a debt of $5 million in 2014, and runs a deficit of $0.3 million in 2015, and a surplus of $0.4 million in 2016, what would its debt be at the end of 2016, assuming no additional interest is added to its debt? A) $4.3 million B) $4.9 million C) $5.3 million D) $5.7 million se the debt by the same amount.

B

The economy is experiencing increased bouts of inflation. The government decides to intervene by decreasing government spending. What kind of fiscal policy is this, and what effect will it have on aggregate demand?

Contractionary; aggregate demand will shift to the left.

Which of the following would be an example of expansionary fiscal policy? A) An increase in the individual income tax rate B) Extending the period in which unemployed workers can collect unemployment benefits c) A decrease in the amount of federal grants given to college students d) A decrease in interest rates

Extending the period in which unemployed workers can collect unemployment benefits

flexible prices

Producers who can't sell their product have two choices: - reduce output and fire employees OR reduce the price of the product to try to sell more (stimulate quantity demanded) - if prices decrease enough, all the output will be sold - if all output is sold, no jobs are sold

a balanced budget is appropriate only if the resulting aggregate demand is _____ with full employment equilibrium

consistent

Which of the following would constitute an expansionary supply-side fiscal policy?

decreasing the tax on corporate profits

leading indicators

early warnings signs used by economists to assess a mild downswing and the beginning of an economic calamity

Keynesian theory

economic theory centered on the idea that government involvement is sometimes needed to stabilize an economy - Keynes argued that if people demand a product, producers will supply it - If aggregate spending isn't sufficient, some goods will remain unsold and some production capacity will be idled - urges increased government spending or tax cuts as mechanisms for increasing aggregate demand (shifting the AD curve to the right).

classical theory

economic theory rooted in the idea that the economy can stabilize itself and "self adjusts" because of flexible prices and flexible wages

supply side fiscal policy

fiscal policy that focuses on increasing aggregate supply to increase an economy's output and decrease the inflation rate

transfer payments

government payments to individuals or firms for which no good or service is provided in return

contractionary fiscal policy

government policy that shifts the aggregate demand curve to the left - decreases GDP -"restraint"

expansionary fiscal policy

government policy that shifts the aggregate demand curve to the right - increases GDP - "stimulus"

what are the tools of expansionary fiscal policy?

government spending, taxes, and transfer payments

debt

he accumulation of past budget deficits minus past budget surpluses

one persons ______ is another persons _______

spending income

steps of expansionary monetary policy: fiscal stimulus through gov spending

steps 1-3 are the same as the steps for gov spending 4. Consumers aren't going to spend 100% of the tax cut because of the MPC of .8. So the tax cut has to be more than the initial stimulus neede

automatic stabilizers

tax and transfer-payment policies that automatically dampen fluctuations in economic activity

outside lag

the delay between a policy change and its resulting effect on the economy

recognition lag

the delay between the onset of a problem and the realization that it actually exists

implementation lag

the delay between the recognition and implementation of a solution

crowding out

the effect of more government spending causing less private investment

budget deficit

the excess of government expenditures over government revenues over a given period, usually one year

budget surplus

the excess of government revenues over government expenditures over a given period, usually one year

recessionary gap

the gap between the actual output level and the full-employment output level when an economy produces less than its full-employment level of output

inflationary gap

the gap between the actual output level and the full-employment output level when an economy produces more than its full-employment level of output

Fiscal policy refers to government policy regarding:

the money supply and interest rates

fiscal policy

the use of government spending, taxes and transfer payments to help stabilize the economy

steps of expansionary monetary policy: fiscal stimulus through gov spending

1. calculate the multiplier 2. determine the amount of the total stimulus required to move the economy to full employment GDP 3. determine the amount of the initial stimulus needed to result in the total stimulus

Suppose a country has a debt of $20 million. Which of the following events would most add to the debt in the following year? A) An increase in the deficit by $500,000. B) A 3% rise in the interest rate. C) An increase in tax revenues by $600,000. D) All of the above would increase the debt by the same amount.

A

flexible wages

Unemployed workers offer their labor at lower wages - As wage rates decline, becomes more affordable for businesses to hire workers - As wage rates decrease, eventually all workers who want to work are employed

proportional tax

a tax system under which everyone pays the same proportion of their income in taxes.

progressive tax

a tax system under which high-income people pay a higher proportion of their income in taxes than low-income people do. - income goes up tax rate goes up

regressive tax

a tax system under which low-income people pay a higher proportion of their income in taxes than high-income people do. - income goes up tax goes down

say's law

a theory that supply creates its own demand - whatever was produced would be sold - all workers seeking employment would be hired - Unsold goods and unemployed labor could emerge, but both would disappear once people had time to adjust prices and wages

If the economy is operating at point A, then there is _____ gap, and the government can _____ transfers to close this gap.

an inflationary; increase

If there is a recessionary gap, then the economy is producing _____ than its full employment level of output, and the government can use _____ fiscal policy to close the gap.

less; an expansionary