Chapter 12

Question 1

fiscal policy

Answer 1

changes in government purchases, taxes, transfers to achieve macroeconomic outcomes of steady growth, full employment and stable prices
- circular flow transmits the effects of fiscal policy

Question 2

injection

Answer 2

spending in the circular flow not starting with consumers, exports

Question 3

leakage

Answer 3

spending leaving out of the circular flow through net taxes, savings, imports

Question 4

multiplier effect

Answer 4

spending injection has multiplied effect on AD
- multiplied increase in AD from: increased gov spending, tax cuts, and increased transfers
- multiplied decrease in AD from: decreased gov spending, tax increase, decreased transfers

Question 5

formula for multipler effect

Answer 5

1/ % of leakages from additional income
- more leakages = smaller multiplier
- less leakages = longer multiplier

Question 6

expansionary fiscal policy

Answer 6

increases AD by increased gov spending and decreasing taxes or increasing transfers
- shifts AD curve rightward (positive AD shock)
- counters a recessionary gap

Question 7

contractionary fiscal policy

Answer 7

decreases AD by decreasing gov spending, increasing taxes or decreasing transfers
- shifts AD curve leftward (negative AD shock)
- counters an inflationary gap

Question 8

when economy is below potential GDP

Answer 8

more increase in AD increases real GDP

Question 9

when economy is at or above potential GDP

Answer 9

more of increase in AD drives up prices

Question 10

hands off

Answer 10

• favours tax cuts to accelerate economy; spending reductions to slow economy
• believes long run benefits of increased AS outweigh short run mismatches between reduced AD & AS
• words used with gov: intervene, interfere, mistake
• USA’s origins created through a revolution against british gov interference

Question 11

hands on

Answer 11

• favours government spending to accelerate economy; tax increases to slow economy
• worries short run costs of decreased AD and recession outweigh long run benefits of econ growth
• words used with gov: act, participate, responsibility
• Canadian origins created by an act of gov

Question 12

gov policies to promote econ growth including spending and tax incentives

Answer 12

• to stimulate saving and increase quantity of capital
• for research and development
• for education and training increasing human capital

fiscal spending and tax policies can increase quantity and quality of inputs, increasing long run and short run as a potential GDP per person

Question 13

supply side effects

Answer 13

incentive effects of taxes on AS
- supply siders believe tax cuts have powerful incentive effects and will increase not decrease government tax revenues

Question 14

Laffer curve

Answer 14

graph showing that as tax rate increases, tax revenues increase, reach a max then decrease

Question 15

gov budget scenarios

Answer 15

balanced budget: revenues = spending

budget deficit: revenues < spending

budget surplus: revenues > spending

Question 16

automatic stabilizers

Answer 16

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

during contractions: tax revenues fall, transfer payments increase, supporting spending and AD but causing automatic budget deficit

during expansions: tax revenues rise, transfer payments decrease, reducing spending and AD but causing automatic budget surplus

Question 17

cyclical deficits and surpluses

Answer 17

created only as a result of automatic stabilizers counteracting business cycles

economists are most concerned with structural deficits and surpluses

Question 18

deficits and surpluses are

Answer 18

FLOWS

Question 19

debt is a

Answer 19

STOCK

Question 20

national debt/ public debt

Answer 20

total amount owed by government = sum of past deficits MINUS sum of past surpluses

Question 21

potential problem of national debt

Answer 21

interest payments create self perpetuating debt
- canada’s yearly deficits between mid 1970-1990 and increasing national debt and interest payments increase yearly deficits

Question 22

crowding out

Answer 22

when government debt financed fiscal policy decreases private investment by raising interest rates

Question 23

crowding in

Answer 23

when government debt financed fiscal policy increases private investment by improving expectations