Ch. 11 Fiscal Policy Questions, Ch. 11 Fiscal Policy Vocab, Ch. 11 Fiscal Policy Videos

Assuming an upward sloping AS curve, to eliminate a recessionary gap, the increase in AD must be ___ than the size of the gap

larger

Suppose full-employment GDP occurs at $8 trillion. If the economy achieves a macro equilibrium at $7.2 trillion, then fiscal ___ (restraint/stimulus) is called for

stimulus

expansionary fiscal policy

stimulus to the aggregate demand: increase government spending or decrease taxes (politicans would prefer this because voters would prefer this)

The initial spending injection is less than

the size of tax cuts

16th Amendment (1913)

Authorized the collection of a progressive income tax. "Progressive" means as you make a higher income, you pay a higher percentage.

The use of gov't taxes and spending to altermacroeconomic outcomes is referred to as ___ policy

fiscal

How to get out of recession (Keynesian)?

get someone to spend more on goods and services

A dollar of tax cuts is less stimulative than a dollar of

government purchases

Aggregate demand includes

government purchases but not income transfers

Deficit

government spending greater than tax revenue (G>T)

IF AD shortfall is $100b and multiplier = 5, $___b is the desired change in gov't spending

$100b/5 = $20b

If gov't spending is $10b and the multiplier is 4, how much total change in spending can we expect

$10b * 4 = $40b

The federal gov't collects approx ___ in tax revenue each yr

$4 trillion

The total change in spending equals:

(multiplier) * (new spending injection)

The impact of fiscal stimulus on AD includes both

- new gov't spending - increases in consumer spending triggered by multiplier effects

Steps to formulate fiscal policty

- specify the amount of the desired AD shift - select the policy tolls needed to induce the desired shift

If initial change in consumption following a $400 billion tax cut is $320 billion, the economy's MPC must be ___

0.8

Multiplier

1/(1-MPC)

If the gov't seeks an int. increase in consumption of $420 billion and the economy's MPC is 0.6, then a tax cut of $___ billion is needed

420/0.6 = 700

What is the debt?

Accumulation of deficits

Fiscal Policy is

Gov gets $ from tax and debt, gov increase spending = shift aggregate demand (direct)

Which one of the following fiscal policty "packages" likely produces the most stimulus to the economy?

Higher purchases, higher transfers, lower taxes

The macroeconomic policies favored by the Trump administration are ___ in nature

Keynesian

Which believes economy is not self-regulating?

Keynesian

The initial fiscal stimulus resulting from an increase in transfer payments is equal to the transfer payment times the ____

MPC

initial increase in consumption =

MPC * Tax Cut

Income Transfers

Payments to individuals for which no current goods or services are exchanged, such as Social Security, welfare, and unemployment benefits.

The government can reduce taxes to shift the aggregate demand curve in which direction?

Right

A rightward AD shift equal to the real GDP gap will leave the economy

Short of full-employment GDP

Increases in which of the following will always accompany a recessionary GDP gap?

Unemployment

The fed gov't ability to tax incomes originated with

a 20th century amendment to the constitution

Crowding out

a decrease in investment that results from government borrowing

The amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes is the

aggregate demand shortfall

Other things equal, an increase in government spending will have what effect on an economy's aggregate demand curve?

cause it to shift out rightward

Fiscal policy

changes in government expenditures and taxation in order to achieve particular macroeconomic goals (maintain stable prices, low unemployment, high sustaining growth)

Which of the following are tools of fiscal policy

changes in tax rates, government purchases, changes in income transfers

Tax cut is used to increase both

consumption and saving

What policy should we use with a recessionary gap (equilibrium GDP > full employment level - low unemployment)?

contractionary policy

The gov't can __ taxes to make AD shift rightward

cut

During a recession, the gov't can __ taxes to increase consumption and shift the aggregate demand curve to the ___

decrease, right

Government Spending in AD

defense, highways, health care entails purcahses of real goods and services in product market

Every dollar of new government spending has a multiplied impact on aggregate

demand

Government spending directly impacts aggregate

demand

To achieve a $500b increase in total spending when MPC=0.8, the desired tax cut must be

desired tax cut = desired fiscal stimulus / MPC = 500/0.8 = $625b

GDP gap (AD excess)

equilibrium GDP down to full-employment GDP

What's wrong with this new equilibrium?

equilibrium output with AD2 < Qf. A rightward AD shift equal to the real GDP gap will leave the economy short of full employment

What policy should we use with a recessionary gap (equilibrium GDP < potential GDP - high unemployment)?

expansionary policy

Unemployment compensation and welfare payments are examples of ___ transfers

income

Disposable Income

income (after taxes) that is available to you for saving or spending

When AD cuvrse shifts to right, the economy moves up along the upawrd sloping AS curve, causing price levels to

increase

Tools of fiscal policy to stimulate the economy

increase in gov't spending and tax reductions

A tax cut contains less fiscal stimulus than an

increase in gov't spending of the same size

AD excess exceeds the

inflationary GDP gap

A tax cut must be ___(more/less) than a proposed increase in gov't spending to achieve the same amount of shift in the aggregate demand curve

more

As long as the AS curve slopes upward, we must increase aggregate demand by

more than the size of the recessionary GDP gap to achieve full employment

Every dollar of new government spending has a

multiplied impact on aggregate demand

The multiple by which an initial change in aggregate spending will alter total expenditure after an infinite number of spending cycles is the

multiplier

Monetary Policy is

printing money, central bank, Federal Reserve, buys debt to lend money, consumers borrow money (b/c lower interest rate) and spend it = stimulate economy (indirect)

3 Ways government can alter aggregate demand

purchasing more or fewer goods and services, raising or lowering taxes, changing the level of income transfers

Increased transfers

raises recipients' disposable income, and spending increases.•The effect is much like a tax cut since the recipients will save some of the payment.

An economy producing below full-employment output is considered to be operating in a

recessionary gap

contractionary fiscal policy

reduce aggregate demand: decrease aggregate spending or increase taxes

President Obama used ___ tool as a part of his 2009 stimulus package and again in 2011

tax cut

Fiscal stimulus

tax cuts or spending hikes intended to increase (shift) aggregate demand

Parts of Fiscal Stimulus of 2009

tax cuts, increased income transfers, increased government spending

A cut in transfer payments works like a

tax hike, reducing the disposable income of transfer recipients

Fiscal restraint

tax hikes or spending cuts intended to reduce (shift) aggregate demand

recessionary GDP gap

the amount by which equilibrium GDP falls short of full-employment GDP

AD shortfall

the amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes

Aggregate Demand (AD)

the amount of total spending on domestic goods and services in an economy

Fiscal policy

the use of government spending and revenue collection to influence the economy