Chapter 10

Question 1

Government Spending

Answer 1

Federal Gov, Prov Gov, Local Gov

Question 2

Direct Taxes

Answer 2

income taxes, government imposing taxes on the workers

Question 3

Indirect taxes

Answer 3

Sales tax, Government imposes taxes on seller and the seller shifts to on the consumer

Question 4

Progressive tax (type of direct tax)

Answer 4

The higher the income, the higher the tax rate

Question 5

Regressive Tax (type of direct tax)

Answer 5

The higher the income the lower the tax, this encourages people to work more.

Question 6

Flat Rate (type of direct tax)

Answer 6

Tax rate is constant, no matter your income you pay the same rate

Question 7

Budget Surplus (T>G)

Answer 7

This surplus could be used to pay off some of its debts or saved. Public debt decreases

Question 8

budget deficit
T<G

Answer 8

Government borrows to finance this deficit, Public debt increases

Question 9

Expansionary Fiscal Policy

Answer 9

Expansionary, used to close recessionary gaps by raising government spending and cutting taxes. AD shifts right

Question 10

Contractionary Fiscal Policy

Answer 10

used to close inflationary gaps by decreasing government spending and increasing taxes, AD shift left

Question 11

Aggregate demand in fiscal policy

Answer 11

AD shifts to close the gaps

Question 12

Time Lags

Answer 12

delays could make the economic problem to get worse and this reduces the effectiveness of fiscal policy “we are too late”

Question 13

Recognition Lag

Answer 13

it takes time to recognize that there is a problem

Question 14

Implementation Lag

Answer 14

it takes time to implement a policy to solve the problem.

Question 15

Impact Lag

Answer 15

it takes time for the policy to have an impact on the economy

Question 16

Crowding out effect

Answer 16

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

Question 17

Crowding in effect

Answer 17

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.

Question 18

Government budget

Answer 18

acts as an automatic stabilizer. It changes in a way that reduces the severity of the business cycles

Question 19

Business Cycles

Answer 19

short term fluctuations in real GDP production

Question 20

Automatic Stabilizer

Answer 20

Government budget automatically changes in a way that reduces the size of output gaps

Question 21

Self correction Mech

Answer 21

Economy automatically closes output gaps on its own

Question 22

Spending Multiplier

Answer 22

measures by how many times GDP “y” changes due to the change in spending

Question 23

Tax Multiplier

Answer 23

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

Question 24

Why is Spending Multi. > Tax Multi. ?

Answer 24

because of that gov spending is a more powerful instrument than T in affecting GDP

Question 25

Factors affecting the size of the spending multi.

Answer 25

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

Question 26

Leakages

Answer 26

They reduce the size of the multiplier, eg taxes, savings, imports.