Chapter 10

Question 1

Fiscal policy is _____.

Answer 1

• change in gov’t taxing/spending that affects GDP

Question 2

Expansionary policies _____, while contractionary policies _____.

Answer 2

• are gov’t policies aimed at increasing aggregate demand to bolster GDP.
• aim to decrease aggregate demand to control the “ups and downs” to prevent hyperinflation and depression.

Question 3

In terms of their effects on the aggregate demand curve, expansionary policies _____ and contractionary policies _____.

Answer 3

• shift the curve to the right

* shift the curve to the left

Question 4

The fiscal multiplier means _____

Answer 4

• the total shift in aggregate demand will be greater than the initial shift.

Question 5

Stabilization policies _____.

Answer 5

• seek to move the economy closer to full employment aka potential output

Question 6

Inside lags _____ while outside lags _____.

Answer 6

• consist of the time it takes to formulate a policy (usually the longer part)
• are the time it takes for a policy to work (usually short)

Question 7

The two components of the federal budget are _____.

Answer 7

• federal purchases and transfer payments

Question 8

Discretionary spending consists of _____, and entitlement and mandatory spending is _____.

Answer 8

• spending programs that Congress authorizes on an annual basis
• authorized by Congress via prior law

Question 9

The fiscal year goes from _____.

Answer 9

• October 1 to September 30

Question 10

Means-tested means _____.

Answer 10

• the benefits you receive from a program are partly based on your income.

Question 11

The sources of revenue, in descending order from how large they are, consist of _____.

Answer 11

• individual income tax, social insurance tax, estate and gift tax, corporation tax, federal excise tax, ad custom duties.

Question 12

Supply-side economics emphasizes _____.

Answer 12

• the role taxes play in the supply of output in the economy.

Question 13

The laffer curve is _____.

Answer 13

• the relationship between the rates and revenue that says high tax rates could lead to less revenue from the gov’t.

Question 14

A budget deficit is when _____, while a budget surplus is _____.

Answer 14

• the gov’t overspends in a given year

* gov’t revenue that exceeds expenses in a given year

Question 15

Increases in deficit works through 3 channels: _____. These three are _____.

Answer 15

• increased transfer payments -> increased income of some households, offsets fall in households
• households that lose income will fall into a lower tax bracket, contribute to spending
• if corporate revenue falls, they fall into a lower tax bracket, leading them to have more revenue
• automatic stabilizers.

Question 16

Deficits – are they bad? No says _____, while yes says _____.

Answer 16

• they serve as automatic stabilizers

* there is a potential for crowding out if the gov’t doesn’t “back off.”

Question 17

Debt refers to _____ instead of a deficit where _____.

Answer 17

• total overspending

* there is one fiscal year of overspending

Question 18

Monetizing the deficit refers to _____.

Answer 18

• purchases made by a central bank of newly issued gov’t bonds.

Question 19

Ricardian equivalent is the proposition that _____.

Answer 19

• it doesn’t matter whether gov’t expenditure is financed by taxes or debt.