Chapter 10 Flashcards
Government Spending
Federal Gov, Prov Gov, Local Gov
Direct Taxes
income taxes, government imposing taxes on the workers
Indirect taxes
Sales tax, Government imposes taxes on seller and the seller shifts to on the consumer
Progressive tax (type of direct tax)
The higher the income, the higher the tax rate
Regressive Tax (type of direct tax)
The higher the income the lower the tax, this encourages people to work more.
Flat Rate (type of direct tax)
Tax rate is constant, no matter your income you pay the same rate
Budget Surplus (T>G)
This surplus could be used to pay off some of its debts or saved. Public debt decreases
budget deficit
T<G
Government borrows to finance this deficit, Public debt increases
Expansionary Fiscal Policy
Expansionary, used to close recessionary gaps by raising government spending and cutting taxes. AD shifts right
Contractionary Fiscal Policy
used to close inflationary gaps by decreasing government spending and increasing taxes, AD shift left
Aggregate demand in fiscal policy
AD shifts to close the gaps
Time Lags
delays could make the economic problem to get worse and this reduces the effectiveness of fiscal policy “we are too late”
Recognition Lag
it takes time to recognize that there is a problem
Implementation Lag
it takes time to implement a policy to solve the problem.
Impact Lag
it takes time for the policy to have an impact on the economy
Crowding out effect
When there is a rec. gap, the gov uses expansionary fiscal policy. Gov has a bigger budget deficit so the need to borrow. Gov competes with consumers and investors to borrow money, cost of borrowing (interest rate) rises. C&I decrease
Since our interest rate is high, CAD$ will appreciate since it offers a high return and this hurts our exports. NetEX decrease
Crowding in effect
This will cancel part of the effect of the contractionary fiscal policy due to the gov borrowing less and the interest rates decreasing because of less competition on borrowing.
Government budget
acts as an automatic stabilizer. It changes in a way that reduces the severity of the business cycles
Business Cycles
short term fluctuations in real GDP production
Automatic Stabilizer
Government budget automatically changes in a way that reduces the size of output gaps
Self correction Mech
Economy automatically closes output gaps on its own
Spending Multiplier
measures by how many times GDP “y” changes due to the change in spending
Tax Multiplier
measures by how many times GDP “y” changes due to the change in tax. Always less than spending multiplier by 1 with a negative sign
Why is Spending Multi. > Tax Multi. ?
because of that gov spending is a more powerful instrument than T in affecting GDP
Factors affecting the size of the spending multi.
Anything that makes you spend more on our goods&services will increase the size of multiplier.
Increase if:
1) MPC increase or MPsave decreases
2) Tax rate decreases
3) Marginal propensity(desire) to import decreases
Leakages
They reduce the size of the multiplier, eg taxes, savings, imports.
