Econ Macro Chapter 16

Change is gov spending =

AD1 -> AD2

Change in real GDP =

AD1 -> AD3

Briefly explain whether each of the following is (1) an example of a discretionary fiscal policy, (2) an example of an automatic stabilizer, or (3) not an example of fiscal policy. The total amount the federal government spends on unemployment insurance decreases during an expansion.

An automatic stabilizer because government spending on unemployment insurance automatically decreases as unemployment declines during an expansion.

Tax multiplier

Change in equi real GDP / Change in taxes (negative #)

Briefly explain whether each of the following is (1) an example of a discretionary fiscal policy, (2) an example of an automatic stabilizer, or (3) not an example of fiscal policy. Congress and the president enact a temporary cut in payroll taxes.

Discretionary fiscal policy if the temporary cut in payroll taxes was intended to stimulate spending and increase real GDP.

Define government purchases multiplier and tax multiplier.

The government purchases multiplier is the ratio of the change in equilibrium real GDP to the change in government purchases. The tax multiplier is the ratio of the change in equilibrium real GDP to the change in taxes.

In what ways does the federal budget serve as an automatic stabilizer for the economy?

When real GDP falls below potential GDP, households and firms pay less in taxes to the federal government and the federal government makes more transfer payments to the unemployed. These changes in taxes and transfer payments make the decline in income smaller than it would otherwise be, which results in a smaller decline in consumption spending. With aggregate demand not declining by as much as it otherwise would, the decline in real GDP is reduced. When real GDP increases above potential GDP, households and firms pay more in taxes and the federal government makes fewer transfer payments. These changes reduce the increase in income that would otherwise take place, which results in a smaller increase in consumption spending. With aggregate demand not increasing by as much as it otherwise would, the increase in real GDP is reduced. By reducing the size of changes in real GDP, the federal budget serves to stabilize the economy.

total expenditures

always moving upward

Fiscal Policy

changes in federal taxes and purchases that are intended to achive macroecon policy goals (Prez and Congress) AT A NATIONAL LEVEL NOY STATE

Purchases of good/services

on a decline

What is fiscal policy? Who is responsible for fiscal policy?

Fiscal policy refers to changes in federal government purchases and taxes that are intended to achieve macroeconomic policy objectives. The president and Congress are responsible for fiscal policy.

Multiplier effect

If gov spending increases by $100 the AD has an autonomous shift (direct) to 100. This inital spending induces (indirect) more spending

Briefly explain whether each of the following is (1) an example of a discretionary fiscal policy, (2) an example of an automatic stabilizer, or (3) not an example of fiscal policy. The federal government changes the required fuel efficiency for new cars.

Not part of fiscal policy, but is an example of environmental policy.

Gov purchase multiplier =

change in equi real GDP / change in Gov. spending (positive #)

Problem: Rising Inflation. What is the type of solution, fiscal action, monetary action and the result?

expansionary, decrease gov spending or increase taxes, decrease money supply, and it results in an decrease in GDP and a increase in price level

Problem: Recession. What is the type of solution, fiscal action, monetary action and the result?

expansionary, increase gov spending or decrease taxes, increase money supply, and it results in an increase in GDP and a decrease in price level

Discretionary Fiscal Policy

gov needs to vote to change spending/taxes (Infasturcture)​

Automatic stabilizers

gov spending and taxes that change with the business cycle (Taxes at a set % and SNAP)

Briefly explain whether each of the following is (1) an example of a discretionary fiscal policy, (2) an example of an automatic stabilizer, or (3) not an example of fiscal policy. The revenue the federal government collects from the individual income tax declines during a recession.

An automatic stabilizer because income taxes paid automatically decline with the fall in income during a recession. However, if the decline in tax revenue was the result of Congress and the president enacting a cut in income tax rates to stimulate the economy, then this action would be an example of discretionary fiscal policy.

Economist Mark Thomas wrote, "One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement. ... Automatic stabilizers bypass this difficulty by doing exactly what their name implies." What are automatic stabilizers? Name two examples of automatic stabilizers and explain how they can reduce the severity of a recession.

Automatic stabilizers refer to government spending and taxes that automatically increase or decrease along with the business cycle. Two examples of automatic stabilizers are unemployment insurance payments, which increase during a recession as more workers become unemployed, and income taxes, which decrease during a recession as incomes fall. During expansions unemployment insurance payments decrease and income taxes increase.

What is meant by "crowding out"? Explain the difference between crowding out in the short run and in the long run.

Crowding out refers to a decline in private expenditures—consumption, investment, and net exports—as a result of an increase in government purchases. In the short run, an increase in government purchases results in partial crowding out, but in the long run, a permanent increase in government purchases results in the complete crowding out of an equal amount of private expenditures.

If Congress and the president decide that an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes? What changes should they make if they decide that a contractionary fiscal policy is necessary?

If policymakers decide to implement an expansionary policy, then they should raise government spending or lower taxes. If they decide to implement a contractionary policy, then they should lower government spending or raise taxes.

Briefly explain whether each of the following is (1) an example of a discretionary fiscal policy, (2) an example of an automatic stabilizer, or (3) not an example of fiscal policy. During a recession, California voters approve additional spending on a statewide high-speed rail system.

Not fiscal policy. This is an infrastructure investment by a state government.

Briefly explain whether each of the following is (1) an example of a discretionary fiscal policy, (2) an example of an automatic stabilizer, or (3) not an example of fiscal policy. a. The federal government increases spending on rebuilding the New Jersey shore following a hurricane.

Not part of fiscal policy because the action is not intended to affect the national economy.

Briefly explain whether each of the following is (1) an example of a discretionary fiscal policy, (2) an example of an automatic stabilizer, or (3) not an example of fiscal policy. The Federal Reserve sells Treasury securities.

Not part of fiscal policy, but is instead an example of monetary policy.

Gov multipliers

gov spending has a direct effect on AD