Ch12 - Fiscal Policy/Natl Debt Flashcards
What are the two main parts of the govt budget?
Outlays (Govt spending) and tax revenue.
Define Fiscal policy
Using changes in govt spending and taxes to affect spending.
What are the 2 parts of govt spending?
Purchases - roads, govt salaries, computers
Transfers - social security, unemployment.
What is the “Budget Deficit/Surplus”?
Difference between govt spending and govt income.
G+TR=T
Balanced budget
G+TR<T
Budget surplus
G+TR>T
Budget deficit
Define Recessionary gap.
Equilibrium GDP is less than full employment GDP
Define inflationary gap.
When Equilibrium GDP is greater than Full employment GDP
How an you create an Expansionary policy?
By increasing G or cutting T.
What does an expansionary policy combat?
A recessionary gap
How do you create a contractionary policy?
Raising T or cutting G.
What does a contractionary policy combat?
Inflationary gap
An expansionary policy shifts the aggregate demand curve which way?
To the right
An contractionary policy shifts the aggregate demand curve which way?
To the left.
What are the 2 effects of expansionary/contractionary policy?
Direct effects and multiplier effects
What is the formula for the Multiplier?
1/(1-MPC)
How do you apply the Multiplier (formula)?
What are the 5 built in stabilizers?
- Progressive tax rates
- Unemployment payments
- Personal savings
- Credit availability
- Other transfer payments
Define “Discresionary Fiscal Policy”.
Deliberate policy measures by congress and pres to change tax rates and spending.
What are the three timing issues associated with Fiscal Policy?
Recognition lag
decision lag
Impact lag
What is crowding out?
G increases and private sector investment drops from increased money demand.
What is Debt?
Cumulative total of all deficits and any surpluses
What is Deficit?
Tax revenue is less than spending in a single year.
Govt tax revenue>govt spending and transfers (T> G+TR) is what kind of budget?
Budget surplus
Govt tax revenue< G+TR) is what kind of budget?
Budget deficit
Define recessionary gap.
Actual GDP<Potential (full employment) GDP
Define inflationary gap.
Actual GDP> potential (full employment) GDP
What fiscal policy is used during recessionary gap?
Expansionary fiscal policy.
What actions are taken for expansionary fiscal policy?
Cut taxes and increase gov spending.
What fiscal policy is used during an inflationary gap?
Contractionary fiscal policy
What actions are taken for contractionary policy?
Raising taxes and cut govt spending.
What is the multiplier formula?
1/(1-MPC)
What is the formula for change in GDP?
What are two automatic stabilizers?
- Progressive tax system (increased income increases tax burden, which slows spending)
- Govt spending on unemployment (increased unemployment increases govt spending which cushions the spending decline caused by the fall in income)
List the 5 problems with Fiscal policy.
- Timing-lags (recog, decision, imp)
- Political consideration-can only do what has been passed.
- Future policy reversal
- State and local gov may offset some impact
- Crowding out effect
How are deficits financed?
- Borrowing from public (problem of crowding out).
2. Print new money (problem of higher inflation)
What is the difference between Debt and Deficit?
Deficit - spending greater than tax revenue in a single year.
Debt - cumulative total of all deficits and surpluses.
What is the normal payments on debt?
Usu. interest paid off (it’s income for many in the future: SSI).
