week 15
over time, potential GDP ______, which is shown by the ________ curve shifting to the right.
increase; long-run aggregate supply
are fed expenditures higher today than they were in 1960>
increased
which of the following raises the largest percentage of federal government revenue
individual income taxes
which can be changed more quickly, monetary policy or fiscal policy?
monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy
If goverment purchases were to decrease by 300 billion or if taxes were increased by 300 billion, the equilbrium level of real GDP would decrease by
more than 300 billion
after sep 11, the fed increased military spending on wars in iraq an afghan. is this increase in spending considered fiscal policy?
no, the increase in defense spending after that date was designed to achieve homeland security objectivies
the fed government increases spending on rebuilding the new jersey shore followind a hurricare, this is an example of
not a discal policy
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 is meant by supply-side economics
supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to increase long-run aggregate supply
a strengthening economy could lead to a downward revision of the projected budget deficit because as GDP increases,
tax revenues increase and government spending decreases, lowering the deficit
who is responsible for fiscal policy
the federal governoment
few economists believe the federal government should attempt to balance its budget every year true or false
true
the goal of expansionary fiscal policy is
to increase aggregate demand
suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into recession, what will happen to the federal budget?
If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease
what best describes the difference between crowding out in the short run and in the long run?
In the short run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purcahses on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures
why does a $1 increase in government purchases lead to more than a $1 increase in income and spending?
Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending.
two example fo automatic stabilizers in tthe us are
UNEmployment insurance payments and the progressive income tax system
which of the follwoing is an example of an expansionary fiscal polcy
a decrease in taxes
if the government cuts taxes in order to increase aggregate demand, the aciton is called
a discretionary fiscal policy
suppose the economy is initially in long-run equilibrium. The government enacts a policy to increase government spending. In the short-run, this expansionary fiscal policy will cause:
a shift from AD1 to AD2, and a movement to point , with a higher price level and higher output
the government decides to increase taxes. In the short-run, this contractionary fiscal policy will cause:
a shift from AD2 to AD1, and a movement to point D, with a lower price level and a lower output
should you disagree or agree with this statement: congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are unpopular.
agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy
the fed pays out for unemployment insurance decreases furing an expansion
an automatic stabilizer
how might an expansionary monetary policy affect the extent of crowding out in the short run
an expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out
research conducted by edward prescott of arizone state university, and edward glaeser of harvard university along with bruce sacerdote of dartmouth college indicate that the effects of supply-side policies...
are as of now unclear and require more careful study
are federal purchases higher today than they were in 1960
as a percentage of GDP , fed purchases have decreased since 1960
the revenue of the ged collects from the indivifaul income tax declines furing a recession
automatic stabilier
government spending and taxes that increase or decrease without any actions taken by the government are referred to as
automatic stabilzers
some spending an d taxes increase or decrease with the business cycle. this event often has an effect on the economy that is similar to fidcal policy and is called
automatic stabilzers
when infrastructure investment is described as a policy lever it means that
because infrastructure investment adds to the productive capacity of the economy, policies that promote it can spur economic growth
what are difficulties congress might run into trying to balance the budget every year. Because government spending and tax revenues
change with GDP, balancing the budget annually would result in economic disruptions
if congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in gov spending or taxes?
congress and the pres should enact policies that increase gov spending and drecrease taxes
the corporate income tax rate is increased- this is part of
contractionary fiscal policy
an attempt to reduce inflation requires _______ fiscal policy, which causes real GDP to ________ and the price level to _______.
contractionary; fall, fall
what is meant by crowding out?
crowding out is a decline in private expenditures as a result of increases in governmnet purcahses
what is a contractionary fiscal policy
decreading gov spending and increasing taxes to decrease aggregate demand
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 effects help to stabilize aggregate demand
what changes should they make if they decide a contractionary fiscal policy
enact policies that decrease gov spending and increase taxes
the individual income tax rate is decreased. this is
expansionary fiscal policy
what is an expansionary fiscal policy
expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand
shat is the fidderence between federal perchases and ferderal expenditures
fed purcahses require that the goc recieves a good or serivce in returen, whereas federal expenditures incrlede tansefer payments
what is fiscal policy
fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives
what is the difference between fed gov purcheases and fed gov expenditures
gov purchases are included in gov expenditures
automatic stabilizers are
gov spending and teaxes that automatically increase or decrease along with the bsuiness cycle
The term crowding out refers to a situation where
government spending increases interest rates and decreases private investment
each year the fed runs a deficit, the federal debt whats. and each year that the federal government runs a surplus, the federal debt whats.
grows and shrinks
what is true about the federal debt
if the debt becomes very large relative to the economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt
If the government increases expenditure without raising taxes, this will
increase the budget deficit and require the government to borrow additional funds
in terms of its effect on the long-run growth rate of real GDP, it is likely to matter more if the additional government spending involves
increased spending on highways and bridges
low government borrowing costs would be relevant for the decision regarding whether a government increases infrastructure investment because
infrastructure investments are long term and expensive investments that require the use of borrowed funds
some economists argue that because increases in government spending crowd out private spending, increased government spending will reduce the long-run growth rate of real GDP. THis is most likely to happen if the private spending being crowded out is
investment spending
if a tax cut has supply-side effects, then
it will affect both aggregate demand and aggregate supply
a policy of cutting the corporate income tax to increase investment spending is intended to result in
long run supply side effects
low government borrowing costs means that
low interest rates make borrowing less expensive
the fed sells tres securities
not a fiscal policy
the ged changes the required gasoline milage for cars
not a fiscal policy
defense spending is increased. this is
not part of fiscal policy
families are allowed to deduct all their expenses for daycare from their federal income taxes. THis is
not part of fiscal policy
the federal reserve lowers the target for the federal funds rate. this is
not part of fiscal policy
econmists use the term fiscal policy to refer to changes in taxing and spending policies
only by the federal government
what is the cycilcally adjusted budget deficit or surplus
the cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were at potential GDP
tax wedge is
the difference between the pretax and the posttax return to an economic activity
what is the difference between the federal budget deficit and the federal government debt?
the federal budget deficit is the year-to-year short fall in tax revenues relative to government spending (T < G + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits
a ripple effect on employment would mean
the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers
why might increasing taxes as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing inflation?
the legislative process experiences longer delays than monetary policy
discretionary fiscal poliyc
the pres, gv, con
tax laws have become increasingly complicated because
the tax laws are used to encourage certain activities and discourage others
the national debt is best measured as
the total value of US treasury securities outstanding
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
when the econ is experiencein an exapnsion automatic stabilizers will cause
transder payments to decrease and tax revenues to increase
the largest and fastest growing category of fed expenses is
transfer payments
how does a budget deficit 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
which of the following are categories of federal government expenditures
transfer payments, interest on the national debt, grants to state and local governmnets
automati stabilizers can reduce the severity of a recession because, during a recession,
unemployment payments rise and tz collections fall,
when is it considered "good policy" for the government to run a budget deficit?
when borrowing is used for long-lived capital goods
is it possible for congress and the president to carry out an expansionary fiscal policy if the money supply does not increase
yes, because fiscal policy and monetary policy are separate things