actuall 13 Flashcards
What is fiscal policy?
Changes in government spending and tax collections aimed at achieving full employment, price stability, and economic growth.
What are the two types of fiscal policy?
Discretionary fiscal policy (requires government action) and nondiscretionary fiscal policy (automatic adjustments based on laws).
What are the main tools of fiscal policy?
Government spending and tax collections.
What are the limitations of fiscal policy?
Time lags, political influence, and the crowding-out effect.
What is the goal of expansionary fiscal policy?
To increase aggregate demand (AD) and real GDP during a recession.
What tools are used in expansionary fiscal policy?
Increased government spending, tax reductions, or a combination of both.
What is the goal of contractionary fiscal policy?
To reduce aggregate demand and control inflation during demand-pull inflation.
What tools are used in contractionary fiscal policy?
Decreased government spending, increased taxes, or a combination of both.
What are automatic stabilizers?
Tax revenues and transfer payments that adjust automatically to changes in economic conditions.
How do progressive taxes contribute to built-in stability?
They increase tax revenues proportionally as GDP rises, helping to moderate economic fluctuations.
What is the role of transfer payments in built-in stability?
They increase during downturns (e.g., unemployment benefits) and decrease during expansions, stabilizing disposable income.
What is the cyclically adjusted budget?
A measure of the government’s budget deficit or surplus at full-employment GDP, removing effects of cyclical changes in GDP.
What indicates expansionary fiscal policy?
An increase in the cyclically adjusted deficit or a move toward deficit due to discretionary actions.
What indicates contractionary fiscal policy?
A decrease in the cyclically adjusted deficit or a move toward surplus.
What are the three timing lags in fiscal policy?
Recognition lag, administrative lag, and operational lag.
What is the crowding-out effect?
Government borrowing raises interest rates, reducing private investment.
How can political considerations affect fiscal policy?
Policies may be influenced by election cycles rather than economic necessity.
Who holds U.S. public debt?
58% by the public, 42% by federal agencies and the Federal Reserve, with 26% held by foreign entities.
How does debt impact income distribution?
Interest payments on debt disproportionately benefit wealthier individuals who own more government securities.
Why is the U.S. unlikely to face bankruptcy due to public debt?
The government can refinance debt and raise taxes as needed.
How does public debt affect future generations?
Much of the debt is internal, meaning repayments remain within the U.S. economy, reducing the burden on future generations.
What is the crowding-out effect of high public debt?
It can raise interest rates, reducing private investment and future economic growth.
What was the impact of the pandemic recession on the U.S. economy?
The GDP gap decreased from -10.7% in March 2020 to -2.8% by early 2021, aided by fiscal stimulus.
What major fiscal policy was enacted during the Great Recession?
The American Recovery and Reinvestment Act (ARRA) of 2009, a $787 billion stimulus package.
What are cyclical deficits?
Deficits that arise automatically during recessions due to lower tax revenues and higher transfer payments.
What is the relationship between debt and GDP?
In 2021, U.S. public debt was 101% of GDP, up from 33% in 2000.
