Unit 14: fiscal policy and trade

The largest component of the balance of payments is called

Balance of trade, the export and import of merchandise

What is supply side theory

Belief that govt should allow market forces to determine prices of ALL goods. Believe the govt should reduce govt spending as well as taxes

What happens when the value of the dollar strengthens against another currency

The price of US products increases in terms of foreign currency. Exports will tend to decrease and imports increase

What happens when the value of the dollar declines against another currency

The prices of US products cost less in terms of foreign currency. Exports will tend to increase and imports decrease

Increasing taxes removes money from where

The private sector, which reduces private sector demand and spending.

What does fiscal policy depend on

The use of taxation and federal spending to increase or decrease the money supply through encouraging or discouraging consumer and business spending

On the US debit side (money flowing out) are

American purchase of foreign goods (US import)

A weak U.S. dollar leads to more A) U.S. imports and a balance of payments surplus. B) U.S. imports and a balance of payments deficit. C) U.S. exports and a balance of payments surplus. D) U.S. exports and a balance of payments deficit.

C) U.S. exports and a balance of payments surplus. When the dollar is weak relative to other currencies, it makes U.S. goods more affordable for foreign consumers to buy, so U.S. exports increase. As more goods flow out of the U.S., more money flows in—surplus.

A strong U.S. dollar leads to more*** A) U.S. imports and a balance of payments surplus. B) U.S. exports and a balance of payments deficit. C) U.S. imports and a balance of payments deficit. D) U.S. exports and a balance of payments surplus.

C) U.S. imports and a balance of payments deficit. When the dollar is strong, it is more affordable for U.S. consumers to buy more foreign goods, so U.S. imports increase. As more imported goods flow in, more money flows out—deficit.

Because the political process determines fiscal policy it takes time for what

For conditions and solutions to be identified and implemented

A weak dollar does what to inflation

Increases the rate of inflation

What are the two prominent fiscal theories

Keynesian and supply-side

Government spending puts money back into the economy. T or f

True

What is the exchange rate

the price of one currency in terms of another

Name the types of debit items

- imports -US investment abroad -US bank loans abroad -US foreign aid

Name the types of credit items

-exports -foreign spending in the US

What happens when debit exceeds credit?

A deficit in the balance of payments occurs,

What happens when credit exceeds debit

A surplus exists

A surplus in the U.S. balance of payments can occur if: 1.interest rates in foreign countries are higher than U.S. domestic rates. 2.interest rates in foreign countries are lower than U.S. domestic rates. 3. U.S. consumers are purchasing (importing) foreign goods. 4. foreign consumers are purchasing (importing) U.S. goods. A) II and IV B) I and III C) II and III D) I and IV

A) II and IV Anything that brings money into our domestic economy leads to a surplus (more money coming in than going out). When interest rates abroad are comparatively lower, money flows into the United States to earn a better rate. When foreign consumers are purchasing more U.S. domestic goods and services, money flows into the United States as well.

Match the following statement to the best expression: A well-controlled, moderately increasing money supply leads to price stability and a healthy economy. A) Monetarist Theory B) Balance of payments C) Keynesian Theory D) Socialism

A) Monetarist Theory Monetarists judge that a well-controlled, moderately increasing money supply leads to price stability. Price stability allows business managers (considered to be more efficient allocators of resources than the government) to plan and invest, which in turn keeps the economy healthy.

The flow of money between the United States and other countries is known as A) the balance of payments. B) the surplus. C) the payment reserves. D) the balance of trade.

A) the balance of payments. The balance of payments represents the flow of money between the United States and other countries.

The largest component of the U.S. balance of payments is A) the balance of trade. B) foreign currency. C) exports. D) imports.

A) the balance of trade. U.S. imports and exports are the components used to calculate the balance of trade. The balance of trade is the measure of those two components against each other—the net being either more money coming into or going out of the U.S. economy. That measure, the balance of trade, is the largest component of the U.S. balance of payments.

The federal government could use which of the following to stimulate the economy? A) Raise taxes B) Increase government spending C) Raise the federal funds rate D) Buy Treasury securities from banks

B) Increase government spending Taxation and government spending are tools of the federal government (president and congress). Changing the federal funds rate and open market activities (buying and selling treasuries) are tools of the Fed. Raising taxes slows down the economy.

Keynesian (demand-side) theory

Belief that the demand for goods controls employment and prices. Insufficient demand for goods causes unemployment and too much demand causes inflation * keynes believe that it was the govts right and responsibility to manipulate overall demand (manipulate the economy) by changing its own levels of spending and taxation

Of the statements listed, which best characterizes the potential impact of factors occurring outside our domestic economy and markets? A) Factors outside the United States never have immediate impact on our securities and trade markets, but over time can impact our domestic economy. B) Factors outside the United States have little impact on our securities and trade markets and thus our domestic economy. C) Factors outside the United States can have immediate and prolonged impact on our securities and trade markets and thus our domestic economy. D) Factors outside the United States can impact our securities and trade markets, but the effects are always short term and thus impact our domestic economy very little.

C) Factors outside the United States can have immediate and prolonged impact on our securities and trade markets and thus our domestic economy. While not all factors outside of the United Sates will impact our domestic economy and markets, some can and will immediately. In these instances, the effects can be prolonged and thus the impact to our overall domestic economy is also felt.

Exports from the United States would likely increase if: 1. the Japanese yen strengthened against the dollar. 2. the U.S. dollar strengthened against the euro. 3. the U.S. dollar weakened against the British pound. 4. the Swiss franc weakened against the dollar. A) II and III B) II and IV C) I and III D) I and IV

C) I and III U.S. exports should increase when foreigners have greater purchasing power. That occurs when their currency is stronger than the dollar.

The federal government could use which of the following to slow the economy? A) Increase government spending B) Buy Treasury securities from banks C) Raise taxes D) Raise the federal funds rate

C) Raise taxes Taxation and government spending are tools of the federal government (president and congress). Changing the federal funds rate and open market activities (buying and selling treasuries) are tools of the Fed. Raising taxes slows down the economy.

The country's annual economic output of all of the goods and services produced within the nation, is known as A) indicators. B) expansion. C) gross domestic product. D) balance of payments.

C) gross domestic product. A nation's annual economic output, all of the goods and services produced within that nation, is its gross domestic product (GDP). U.S. GDP includes personal consumption, government spending, gross private investment, foreign investment, and net exports.

Supply side focuses on what

Creating a healthy environment for business by decreasing the tax and regulatory burden on business. The theory suggests that healthy business will grow, expanding heir workforce's and creating a strong and steady demand for labor . Employed people will have the capital to spend and will grow the economy, creating more demand

The U.S. balance of payments deficit would decrease in all of the following scenarios except A) a decrease in dividend payments by U.S. companies to foreign investors. B) a decrease in imports of foreign goods into the United States. C) an increase in exports of domestic goods from the United States. D) a decrease in purchases of U.S. securities by foreign investors.

D) a decrease in purchases of U.S. securities by foreign investors. A deficit in the balance of payments occurs when more money is flowing out of the country than in. When foreign investors decrease their purchases of U.S. securities, the flow of money coming into the United States decreases, this adds to the deficit rather than decreasing it.

To contract or slow economic growth U.S. fiscal policy should be to A) cut taxes and increase government spending for programs and development. B) raise taxes and government spending for programs and development. C) cut taxes and government spending for programs and development. D) raise taxes and cut government spending for programs and development

D) raise taxes and cut government spending for programs and development. Fiscal policies to slow economic growth or contract the economy would encompass both increases in taxes leaving consumers with less money to spend, slowing economic growth, and cutting government spending for programs and development that would otherwise have created more jobs. Fewer jobs will slow economic growth as well.

Both theories believe that

Decreasing taxes encourages economic activity and increasing discourages economic activity

Demand side focuses on what

Directly increasing the supply of money to the consumer. Increasing money in the consumers pockets encourages spending (an increasing the demand for goods and services)

Decreasing money supply of the consumer does what

Discouraged spending, so decreases demand for goods and services

What is monetary policy?

How the government regulates the amount of money in circulation (FRB)

What are two distinctive types of polices that impact our economy

Monetary and fiscal.

Can fiscal policy solve short term economic problems?

No because it takes too long to exact fiscal policy decisions

In supply side theory, sellers of goods will what

Peelers of goods will Price the goods at a rate that allows them to meet market demand and still sell them profitably

The US credit side (money flowing in) is what

Sales of American products to foreign counties (US export)

The balance of payments may be a ___

Surplus! More money flowing in than out or deficit more money flowing out than in)

A strong dollar means what for imports

That imports are less expensive here in the US. Strong dollar helps keep inflation in check in the US

What is fiscal policy based on

The assumption that the govt can control such economic forces as unemployment levels and inflation by adjusting over demand for goods and services

Balance of payments is

The flow of money between US and other countries

To increase private- sector demand for goods, what happens

The govt reduces taxes which increases people's disposable income

When might a deficit occur

When interest rates in another country are high because money flows to where it earns the highest return

What is fiscal policy

government adjusts its spending levels and tax rates to monitor and influence a nation's economy. Book definition: the govt budget decisions and tax policy as enacted by president and congress