C.13 Fiscal Policy in the Short Run

Question 1

Automatic stablizers

Answer 1

Taxes, transfer payments, or govt expenditures that automatically increase or decrease along with the business cycle

Question 2

Cyclically adjusted (structural) budget deficit or surplus

Answer 2

The deficit or surplus in the federal gvn’ts budget if real GDP equaled potential GDP; also called full-employment budget deficit or surplus

Question 3

Discretionary fiscal policy

Answer 3

Govt policy that involves deliberate changes in taxes, transfer payments, or govt purchases to achieve macroeconomic policy objectives

Question 4

Gross federal debt

Answer 4

The total dollar value of govt bonds outstanding plus superannuation (pensions) owed by the federal government as an employer to its employees plus accounts and interest payable

Question 5

Tax wedge

Answer 5

The difference between the before-tax and after-tax return to an economic activity

Question 6

Budget deficit

Answer 6

Cyclically adjusted budget deficit + Effect of automatic stablizers

Question 7

Fiscal policy ____ the IS curve

Answer 7

Shifts

Question 8

A shift in the IS curve causes a _______ in the Phillips curve

Answer 8

movement along

Question 9

A decrease in the personal tax rate _____ the size of the multiplier

Answer 9

increases

Question 10

When taxes are proportional to income and spending on domestic goods and services is taken into account the multiplier is equal to

Answer 10

m = (1-t)MPC(1 - im)
where im is proportion of all spending that is on imports

multiplier = 1/(1-m)

Question 11

Crowding out

Answer 11

crowding out is a reduction in private investment caused by government budget deficits which affects households’ and firms’ ability to borrow

Question 12

In a severe recession the multiplier is likely to be large because

Answer 12

Competition for resources is less intense, the upward pressure on resource prices is minimal, and unemployed resources are readily available

Question 13

Fiscal policy in an open economy with a floating exchange rate is _____ effective because the interest rate is _____ affected by which variables?

Answer 13

Less; more; variables like net exports instead of just consumption and investment

Question 14

Fiscal policy is _____ effective in an open economy with a fixed exchange rate. Why?

Answer 14

More. The policy’s impact on the real interest rate is negated by the central bank’s commitment to the fixed exchange rate, so there are no offsets to the fiscal policy from interest rate induced changes in consumption and investment

Question 15

In a small open economy the effectiveness of a fiscal policy will be ______. Why?

Answer 15

Enhanced since the real interest rate doesn’t change in a small open economy