Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ECO105 MACRO > chapter 12 > Flashcards

chapter 12 Flashcards

1
Q

def

Fiscal policy

A

is about the changes governments make to purchases, transfers, and taxes in trying to achieve the key macroeconomic outcomes of steady growth, full employment, and stable prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Fiscal policy works through

A

aggregate demand, speeding up or slowing down an economy facing recessionary or inflationary gaps

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

def

Injection

A

spending in the circular flow that does not start with consumers: government spending (G), business investment spending (I), exports (X)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

def

Leakage

A

spending that leaks out of the circular flow through taxes, savings, and imports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

def

Multiplier effect

A

a spending injection has a multiplied effect on aggregate demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How do you get a smaller multiplier effect

A

More leakages

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How do you get a larger multiplier effect

A

Fewer leakages

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

formula

Size of Multiplier Effect

A

1/% of leakages from additional income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Changes in government spending on products and services or in net taxes have multiplied effects on

A

aggregate demand and real GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Effects of a tax cut or an increase in transfer payments in leakages

A

reduces leakages, leaving consumers with more money to spend

The new spending has a multiplied effect, increasing aggregate demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Effect of an increase in taxes or decrease in transfers

A

increase in leakages, leaving consumers with less money to spend

The reduced spending has a multiplied effect, decreasing aggregate demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

what type of shock

An increase in government spending or a decrease in taxes is a

A

positive aggregate demand shock, shifting the aggregate demand curve rightward

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what type of shock

A decrease in government spending or an increase in taxes is a

A

negative aggregate demand shock, shifting the aggregate demand curve leftward by the multiplied effect of the initial decrease in income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

most volatile part of aggregate demand

A

Business investment spending as it fluctuates up and down with changes in interest rates and expectations of future profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

def

Export-Led growth

A

Economic growth driven by the multiplied effects of increasing exports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

def

Expansionary fiscal policy

A

increases aggregate demand by increasing government spending, decreasing taxes, or increasing transfers; shifts the aggregate demand curve rightward, a positive demand shock

Fiscal policies to increase government spending, cut taxes, or increase transfers are positive aggregate demand shocks for countering a recessionary gap

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

def

Contractionary fiscal policy

A

decreases aggregate demand by decreasing government spending, increasing taxes, or decreasing transfers; shifts the aggregate demand curve leftward, a negative aggregate demand shock

To decrease aggregate demand, governments can decrease spending, raise taxes, or decrease transfer payments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Any change in injections has a multiplied effect of

A

aggregate demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

what direction

Injections increasing causes a shift

A

rightward

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

what direction

Injections decreasing causes a shift

A

leftward

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

When the economy is in recession and far below potential GDP, more of the increase in aggregate demand increases

A

real GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

When the economy is at or above potential GDP, more of the increase in aggregate demand increases

A

prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Beliefs

Hands-Off Demand-Side Fiscal Policies

A
  • The government should keep its hands off the economy whenever possible
  • If fiscal policy is necessary to accelerate the economy, tax cuts are favored instead of increased government spending; This puts more money in the hands of private individuals and businesses
  • Government spending is subject to political influence and is not always spent where it is needed
  • If fiscal policy is necessary to slow down the economy, government spending is favored over tax increases; This keeps money in the hands of private individuals and businesses
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Beliefs

Hands-On Demand-Side Fiscal Policies

A
  • Essential hands-on role for government to correct failures
  • All forms of fiscal policy are acceptable, especially when monetary policy is ineffective due to transmission breakdowns
  • Favors government spending over taxes; More effective, since consumers and businesses may save the money from tax cuts
  • If fiscal policy is necessary to slow the economy down the hand-on position favors tax increases over reduced government spending; This preserves the government’s ability to stabilize the economy
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Policies for Economic Growth

A
  • Stimulate saving and capital investment
  • Encourage Research and Development
  • Improve Education and Training
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Stimulate saving and capital investment

A
  • Tax incentives can stimulate saving, increase the quantity of capital, and promote economic growth
  • Governments uses tax incentives as a fiscal policy tool to stimulate saving and increase the quantity of capital available

Government tax exemptions for interest earned in Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) reward saving and increase the supply of loanable funds, making it easier and cheaper for businesses to borrow to finance new factories or new machinery and promote economic growth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Encourage Research and Development

A
  • Government spending and tax incentives for research and development promote economic growth
  • Government uses targeted government spending and tax incentives as fiscal policy to encourage research and development
  • Government also provides tax incentives to businesses to encourage research and development
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Improve Education and Training

A
  • Government-financed education and training that increase human capital promote economic growth
    Human capital increases through education and training
  • Businesses are willing to pay higher wages to workers with more human capital because they are more productive
  • Government can spend to directly provide education and it can provide subsidies to schools and students
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Hands-off Save

A
  • Strongly supports fiscal policies to encourage saving and capital investment
  • Believe that as saving flows into the loanable funds market, interest rates quickly fall, encouraging more consumer spending and business borrowing to finance more investment spending (I)
  • These spending increases offset the additional saving, restoring aggregate demand to match aggregate supply
  • Outweigh any short-run mismatches between aggregate demand and aggregate supply
30
Q

Hands-On: Spend

A
  • Worried that when businesses see reduced consumer spending, they will postpone investment spending
  • Even if saving causes interest rates to fall in the loanable funds market, more pessimistic expectations about sales and profits outweigh the lower costs of borrowing
  • While they see the long-run benefits of increased saving for aggregate supply and economic growth they are concerned that short-run decreases in aggregate demand may cause a recession because markets fail to quickly adjust
31
Q

Who said “In the long run we are all dead”

A

KEYNES

32
Q

Supply-side effects

A

the incentive effects of taxes on aggregate supply

33
Q

Why do tax cuts have supply-side effects

A
  • if the government cuts taxes on labor as well as on capital investments, the quantities of labor and capital inputs supplied to markets could increase, increasing aggregate supply
  • Tax cuts can increase aggregate supply and potential GDP through supply-side effects
34
Q

What do all economists believe about tax cuts

A
  • that have incentive effects causing a small increase in aggregate supply → shifting both the LAS and SAS curves rightward
  • Supply-side effects are small because most people already work as many hours as they can and don’t get much choice from their bosses over how long to work
35
Q

def

Supply-Siders

A

believe that tax cuts have powerful incentive effects and claim that tax cuts will increase government tax revenues

36
Q

Who mainly supports supply-sider argument to argue for tax cuts

A

Politicians who favor a hands-off role for government, no empirical evidence to support the claim

Argument: tax cuts will increase, not decrease government tax revenues

37
Q

Balanced budget

A

income and spending match

38
Q

Deficit

A

amount by which your spending exceeds income for the month

39
Q

Debt

A

borrowing from student loans, credit cards, or family

40
Q

Surplus

A

amount by which your income exceeds your spending for the month

41
Q

Government revenue comes from what sources

A

personal income taxes, corporate taxes, employment insurance premiums, GST/HST

42
Q

def

Automatic stabilizers

A

tax and transfer adjustments that counteract changes to real GDP without explicit government decisions

43
Q

What happens to tax revenues and transfer payments when a positive demand shock causes the economy to expand beyond potential GDP

A

tax revenues increase and transfer payments decrease

44
Q

When were automatic stabilizers introduced

A

after the Great Depression; since then, business cycles in Canada have been less frequent, and contractions have been less severe

45
Q

Opportunity cost of automatic stabilizers

A

Increases in government budget deficits and accumulated debt since the Global Financial Crisis

46
Q

Automatic stbailizers in a negative demand shock

A

As automatic stabilizers start working, tax revenues decrease and spending on transfer payments increases, creating an automatic budget deficit

47
Q

Automatic stbailizers in a positive demand shock

A

As automatic stabilizers start working, tax revenues increase and spending on transfer payments decrease, automatically creating a budget surplus

48
Q

Cyclical deficits and surpluses

A

created only as a result of automatic stabilizers counteracting business cycles

49
Q

What can happen due to government’s attempt to balance the budget during an expansion

A

increases aggregate demand, increasing the risk of inflation

50
Q

Good Balanced Budgets over the Business Cycle

A

With a balanced budget over the business cycles, cyclical surpluses during expansions offset cyclical deficits during contractions

A good balanced budget will have a surplus during the expansion and a deficit during the contraction

51
Q
A
52
Q

How to know if the budget is balanced over the business cycle

A

the positive amount of the surplus equals the negative amount of the deficit

53
Q

def

Structural deficits and surpluses

A

budget deficits and surpluses occurring at potential GDP

54
Q

When does a structural deficit occur

A

when governments spend more than their revenues even while the economy is at potential GDP and growing steadily

Not caused by business cycles, they are built into the structure of government taxes, transfers and spending programs

55
Q

When does a structural surplus occur

A

when there is a government budget surplus even while the economy is at potential GDP and growing steadily

56
Q

Problems with structural deficits

A
  • Structural deficits are ongoing; even when the economy is at full employment, the government has to borrow money
  • There are no offsetting surpluses; as deficits accumulate, the government must go deeper into debt
57
Q

Problems with structural surpluses

A

Accumulate over time, raising the question of why government keeps collecting taxpayers’ money that it is not spending

58
Q

Deficits are a

A

flow because they must be measured for a specified time dimension

59
Q

Debt is a

A

stock, fixed amount at a moment in time

60
Q

National debt

A

total amount owed by government
* = (sum of past deficits) - (sum of past surpluses)

61
Q

How is the national debt measured?

A

measured in the nominal prices of that year

62
Q

The most meaningful measure of the national debt

A

national debt as a percentage of GDP

63
Q

Myths and Problems about the National Debt

A
  1. Canada will not go bankrupt bc of debt: The Government of Canada never has to pay back the national debt, it can simply refinance it
  2. Burden for Future Generations: Whether or not the national debt is a burden for future generations depends on who receives interest payments on the national debt (canadians or non-canadians)
  3. Debt is always bad: Debt is a smart choice if the expected future profits or benefits from spending the borrowed money are greater than the interest costs on the loan
  4. Interest payments create self-perpetuating debt: There is a vicious cycle when yearly deficits increase national debt, increasing interest payments, increasing yearly deficits, etc.
64
Q

Crowding out

A

tendency for government debt-financed fiscal policy to decrease private investment spending by raising interest rates

High government borrowing raises interest rates, which in turn reduced some private investment

65
Q

Crowding in

A

tendency for government debt-financed fiscal policy to increase private investment spending by improving expectations

The improvement in business expectations of profitability may increase private investment

66
Q

United States origin

A
  • created through a revolution against British government interference, has hands-off political origins
  • Focus was on the individual’s right to pursue their own destiny, free from government restrictions
  • Hands-off: government should not intervene, interfere, mistake
67
Q

Canada Origin

A
  • created by an act of government, has hands-on origins
  • Stresses government’s responsibility to promote and protect the public good
  • Hands-on: “government needs to act, responsibility, participation”
68
Q

Normative statements

A

involve value judgements or opinions, “should”

69
Q

Positive statements

A

can be evaluated as true or false, facts

70
Q

Politicians decide on

A

government tax, transfer and spending programs

71
Q

Political hands-off arguments against government are often disguised as

A

arguments against the national debt

ECO105 MACRO (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions