Book 1_Econ_FISCAL POLICY

Question 1

Fiscal policy

Answer 1

refers to a government’s use of spending and taxation to influence
economic activity

Question 2

The budget

Answer 2

• to be balanced when tax revenues equal government expenditures
• A budget surplus occurs when government tax revenues exceed expenditures
  -a budget deficit occurs when government expenditures exceed tax revenues

Question 3

Monetary policy

Answer 3

refers to the central bank’s actions that affect the quantity of
money and credit in an economy to influence economic activity.

Question 4

Policy objectives of fiscal and monetary

Answer 4

Policymakers use both monetary and fiscal policies with the goals of maintaining stable prices and producing positive economic growth

Question 5

Objectives of fiscal policy

Answer 5

Influencing the level of economic activity and aggregate demand
Redistributing wealth and income among segments of the population
Allocating resources among economic agents and sectors in the economy

Question 6

Discretionary fiscal policy

Answer 6

refers to the spending and taxing decisions of a national government that are intended to stabilize the economy.

Question 7

Automatic stabilizers

Answer 7

are built-in fiscal devices triggered by the state of the economy

Question 8

A country’s debt ratio

Answer 8

the ratio of aggregate debt to GDP

Question 9

Against the government deficit: The crowding-out effect

Answer 9

government borrowing is taking the place of
private-sector borrowing.

Question 10

Ricardian equivalence

Answer 10

which means privatesector savings in anticipation of future tax liabilities just offset the government deficit.

Question 11

Spending Tools

Answer 11

Transfer payments
Current spending
Capital spending

Question 12

Transfer payments

Answer 12

entitlement programs, redistribute wealth,
taxing some and making payments to others. Examples include government-run
retirement income plans (such as Social Security in the United States) and
unemployment insurance benefits.

Question 13

Current spending

Answer 13

refers to government purchases of goods and services on an
ongoing and routine basis.

Question 14

Capital spending

Answer 14

refers to government spending on infrastructure, such as roads,
schools, bridges, and hospitals

Question 15

Revenue Tools

Answer 15

Direct taxes
Indirect taxes

Question 16

Advantages of fiscal policy tools

Answer 16

Social policies (e.g., discouraging tobacco use) can be implemented quickly via indirect taxes.

Quick implementation of indirect taxes also means that government revenues can be increased without significant additional costs.

Question 17

Disadvantages of fiscal policy tools

Answer 17

Direct taxes and transfer payments take time to implement, delaying the impact of fiscal policy.

Capital spending also takes a long time to implement; the economy may have recovered by the time its impact is felt.

Question 18

MPC

Answer 18

Marginal propensity to consume (MPC) measures how much more individuals will spend for every additional dollar of income

Question 19

The fiscal multiplier

Answer 19

determines the potential increase in aggregate demand resulting from an increase in government spending:
- Fiscal multiplier = 1/(1-MPC(1-t))

Question 20

Balanced Budget Multiplier

Answer 20

To balance the budget, the government could increase taxes by $100 to just offset a $100 increase in spending
the overall decrease in aggregate demand = 100(MPC) × fiscal multiplier

Question 21

three types of lag

Answer 21

Recognition lag
Action lag
Impact lag

Question 22

Issues may hinder the usefulness of fiscal policy

Answer 22

Misreading economic statistics.
Crowding-out effect
Supply shortages
Limits to deficits
Multiple targets

Question 23

expansionary or contractionary

Answer 23

expansionary: Increase deficit (decrease Rev, increase Spending)
contractionary: Decrease deficit (increase Rev, decrease Spending)