Ch.7 Fiscal Policy

Question 1

Gov’s approach towards
Spending & Taxation

Answer 1

Fiscal Policy

Question 2

Balanced Budget
when NTR = __

Answer 2

NTR = Gov spending

Question 3

Which Source of
Gov Revenues incl.
- Crown Corp Income
- other Gov Investment
- Bank of Canada earnings

Answer 3

Nontax Revenues

Question 4

In Gov Expenses
- Transfers to Persons &
- Public Debt Charges (interests)
are categorized as

Answer 4

Transfer Payments

Question 5

In Gov Expenses
- Spending Grants to Other Levels of Gov &
- Direct Program Spending
are categorized as

Answer 5

Gov Spending

Question 6

Which Source of
Gov Expenses incl.
- Post-2nd Edu
- Health
- Social Assist.
- Equal. Pmt. to Provinces
- Aid Dev. Nations
- Dues to Int’l Org

Answer 6

Spending Grants to Other Levels of Gov

Question 7

Which Source of
Gov Expenses incl.
- Spending on Depts of Gov
- Crown Corp

Answer 7

Direct Program Spending

Question 8

Net Tax Revenue

NTR =

Answer 8

NTR = Tax Rev - Transfer Pmts

Question 9

Budget Balance = ?

relationship btw NTR / G / Budget Line

Answer 9

= NTR - G
= (Tax Rev - TP) - G

Question 10

3 Factors which affect
Gov Budget

(Budget=NTR-G)

Answer 10

1) NTR affected by
GDP (affect Tax Rev & TP)
& Tax Rate
2) Gov Spending

Question 11

Gov Spending ↑
⇒ Budget Line
BL ↑/↓?

Tax ↑
⇒ Budget Line
BL ↑/↓?

Answer 11

Gov Spending ↑ ⇒ BL↓

Tax ↑ ⇒ BL ↑

Question 12

3 Schools of
Fiscal Policy

Answer 12

① Countercyclical FP
Keynes：Gov救市
G↑ T↓ in Recession
G↓ T↑ in Inflation
⇒ AD → LAS
② Balanced-Budget FP
Gov：有$多花，沒$少花
Automatic Stabilizer: like ①
Self-Adjustment ⇒ AS → LAS
∵ wage↑ in Inflation
& wage↓ in Recession
③ Cyclical Balanced Budget FP
Balance budget over Biz Cycle
⇒Accept Cyclical Deficit/Surplus
Avoid Structural Deficit/Surplus

Question 13

Tax Law & Gov Spending
set out to
↓ G @Inflation &
↑ G @Recession

Answer 13

Automatic Stabilizers

Question 14

4 Shortcomings of
Countercyclical Fiscal Policy

Answer 14

1) Delay (slow gov)
2) Inflationary Bias
$↑ when rising
3) Crowd-out Effect
排擠效應 Int Rate↑⇒I ↓
4) Budget Deficit↑⇒Debt↑
G↑ T↓ when rising

時間、通膨、利率、國債↑

Question 15

Gov pushes economy
in the same direction in
Recession/Inflation

Answer 15

Procyclical

Question 16

Balanced-Budget FP
is Effective when
Budget ___ in Inflation/
Budget ___ in Recession

Answer 16

Budget
Deficit in Inflation
Surplus in Recession

Question 17

Shortcoming of
Balanced-Budget Fiscal Policy

Answer 17

Procyclical Tendencies:
Unemployment↑ in Recession
CPI↑ in Inflation

Question 18

Result of
Reducing G & T
by the same amt

Answer 18

GDP ↓

(-)G multiplier > (+)T multiplier

Question 19

The Budget Deficit
that exists @
① Full-Employment GDP
② Recession

Answer 19

① Structural Deficit

② Cyclical Deficit
0 when full employment

Question 20

Relationships btw
Structural Deficit/
Cyclical Deficit/
Actual Deficit

Answer 20

Cyclical=Actual-Structural

Question 21

3 Shortcomings of
Cyclical Balanced Budget Fiscal Policy

Answer 21

① Size of Inflationary gap
=/≠ Recessionary gap
⇒Deficit after biz cycle
② Politically,
G↑ in Recession is Easy
G↓ in Inflation is Hard
⇒ Cyclical deficit→ Structural
③ Biz Cycle>Politician Term
⇒ Blame earlier Gov

Question 22

2 Views of
National Debt Size

Answer 22

① Per Capita Debt
in constant dollar
② % of Real GDP

Question 23

4 Reasons why
Canada’s National Debt ↑

Answer 23

① Finance against Recession
② Finance for WWII
③ Income Support Prog. ↑
④ High Interest Rate
in past decades

Question 24

4 Potential Problems w/
National Debt

Answer 24

① Interest paid Abroad
② Interest paid Rich Canadians
Income Redistribution Effect
③ ↓Gov Ability for citizen needs
④ ↑Gov Greed/Waste

Question 25

4 Criticisms of
of National Debt
are Invalid bcuz

Answer 25

① A Country cannot Bankrupt
② Bonds are inherited w/ Debt
③ Assets > Liabilities ?
④ Debt/GDP ratio=31% <50%

Question 26

Bond Rating ↓
= Risk __ &
Interest __

Answer 26

Risk ↑
Interest ↑