Chapter 11 - Fiscal Policy

Question 1

What are the four goals of fiscal policy?

Answer 1

1. Promote smooth functioning of the economy
2. Reduce cyclical fluctuations in output and employment
3. Income redistribution
4. Promote economic growth

Question 2

What are the tools of fiscal policy?

Answer 2

Government purchases of goods and services, government transfer, and taxes

Question 3

What is the difference between direct and indirect taxes?

Answer 3

Direct taxes are imposed directly on factors of production i.e. income taxes, corporate taxes, property taxes
Indirect taxes are consumption taxes i.e. GST, sales, excise

Question 4

What is the difference between transfers and government purchases?

Answer 4

Transfers do not imply an exchange of services i.e. do not expect anything in exchange for providing welfare

Question 5

What is the equation for disposable income?

Answer 5

Disposable income = earned income - taxes + income transfers

Transfers are like negative taxes

Question 6

What is automatic fiscal policy?

Answer 6

Changes in taxes and transfers from the business cycle

Question 7

What is discretionary fiscal policy?

Answer 7

Deliberate changes in taxes, transfers, and purchases by the government

Question 8

What is the equation for the multiplier and what is it?

Answer 8

Equation:
change in Y = change in Y / change in government spending
= 1 / 1-MPC

The ratio in the change in output resulting from a one dollar change of government spending

Question 9

Why does an increase in income exceed the original increase in government expenditure?

Answer 9

When the government spends a dollar, expenditure increases by a dollar, which becomes income, and people who get extra income save a part and spend the rest, and this goes on

Question 10

What is the multiplier equation with MPI? What is it with taxes?

Answer 10

Without taxes: 1/ 1 - (MPC - MPI)
With taxes: 1/1-(MPC-MPI)(1-t)

Question 11

If government spending increases temporarily, what happens to MPC and the multiplier?

Answer 11

MPC and the multiplier will be lower

Question 12

To calculate the effect of government spending on income in the near future, what do you do to the multiplier?

Answer 12

Multiply it by .5
Ex. 1/1-(MPC-MPI)(1-t)* .5

Question 13

Why is fiscal policy limited?

Answer 13

a) the multiplier depends on many factors
b) the multiplier is not large

Question 14

Is the multiplier bigger or smaller in financial crisis? Why?

Answer 14

Bigger, because there is little private borrowing since credit is restricted - government can do what private industry cannot, so releases borrowing constraints

Question 15

What is a surplus vs a deficit vs primary surplus?

Answer 15

Surplus = revenue - total spending
Deficit = - surplus
Primary surplus = revenue - program spending excluding interest on debt (only matters when the country defaults on debt)

Question 16

What is a goal for countries in fiscal trouble?

Answer 16

To have a primary surplus - want primary balance

Question 17

What is a benefit to primary surplus?

Answer 17

Shows effect of current actions because it excludes interest on debt, which is for actions in the past

Question 18

What was the deficit in 2020?

Answer 18

10.7%

Question 19

Up until what year was there a surplus?

Answer 19

2008

Question 20

What percent of GDP are interest payments now?

Answer 20

Around 1%

Question 21

What is the meaning of fiscal dividend?

Answer 21

Benfit gained from lower interest payments on debt (like a reduction on interest payments if you repay part of debt

Question 22

When the government has surpluses, what happens to interest rates?

Answer 22

Interest rates fall

Question 23

If interest rates fall because of surplus, that is a:

Answer 23

fiscal dividend

Question 24

By what percent has net debt increased in comparison to before 2019?

Answer 24

50%

Question 25

What is net debt?

Answer 25

The sum of all past deficits

Question 26

What is the federal primary surplus/deficit?

Answer 26

The difference between federal revenue and expenditure, ignoring interest on debt

Question 27

What is the average primary deficit percentage?

Answer 27

1%

Question 28

What is the deficit when the economy is booming?

Answer 28

Deficit is low because of large revenues and lower expenditure, so cyclically adjusted deficit is higher than actual deficit

Question 29

What is the deficit where there is a recession?

Answer 29

Deficit is high because of low revenues and higher expenditure, so cyclically adjusted deficit is lower than the actual deficit.

Question 30

Was there a deficit or surplus in 2020?

Answer 30

Huge deficit

Question 31

What percent of GDP is made of federal and provincal debt currently?

Answer 31

40%

Question 32

What are payroll taxes?

Answer 32

Social insurance contributions, employment insurance, etc

Question 33

For what stage of production is GST paid at?

Answer 33

Each stage of production

Question 34

What tax makes up the biggest portion of revenue for the federal government?

Answer 34

Income tax (50%)

Question 35

What percent of federal revenue makes up GDP currently?

Answer 35

14%

Question 36

What percent of GDP was federal income during the great recession? What did it increase by after?

Answer 36

14.7% of GDP, after increased by 1.5%

Question 37

Can Canada eliminate the deficit? How?

Answer 37

Yes, it has happened before. By having participation from all governments, having political parties on board, and having attitudes towards the deficit change

Question 38

By 2011, what percent of GDP was Japan in debt?

Answer 38

200%

Question 39

True or false: the Great Recession caused the large debts of the G7

Answer 39

True

Question 40

After the Great Recession, where did debt not accumulate? What country had the second lowest debt accumulation?

Answer 40

Germany did not accumulate debt, Canada had the second lowest

Question 41

What countries had debt increase more during the Pandemic than during the Recession?

Answer 41

Canada, Italy, and Japan