Chapter 11: Fiscal Policies

Question 1

Effects of expansionary policies

Answer 1

Reducing recession by increasing government spending or reducing taxes, decreases unemployment, might cause inflation.

Question 2

Effects of contractionary policies

Answer 2

Reduce inflation by lowering government spending and raising taxes, may cause unemployment

Question 3

What are automatic stabilizers, examples?

Answer 3

Measures that act to reduce the change in business cycle, income tax, welfare, Insurance

Question 4

Describe the multiplier effect

Answer 4

The magnified impact of any spending change on aggregate demand. Ex. The Income from one product can lead to the purchase of another product, which magnifies the effect on total expenditures/aggregate demand

Question 5

What is Marginal propensity to consume (MPC)

Answer 5

The change in domestic consumption from a change in income

Question 6

What is marginal propensity to withdraw

Answer 6

The effect of a change in income on withdraws (Savings, taxes, imports)

Question 7

What are some drawbacks of Fiscal Policies?

Answer 7

Policy Delays, effected by politics, and public/government debt from enacting policies

Question 8

Describe annually balanced budget

Answer 8

All expenditures and revenue must be balanced yearly, more spending means more taxes

Question 9

Describe cyclically balanced budget

Answer 9

Expenditures and revenues should balance over one business cycle

Question 10

Describe functional Finance

Answer 10

the principle that government should be geared to the yearly needs of the economy

Question 11

What is the interest rate growth rule

Answer 11

if nominal interest rate (r) > growth in nominal GDP (g), budget surplus is needed to stabilize public debt. If r < g public debt may still fall despite budget defecits