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Pharmoeconomics Exam 2 > Chapter 12 - Fiscal Policy > Flashcards

Chapter 12 - Fiscal Policy Flashcards

1
Q

What is aggregate demand?

A

The total quantity of output demanded at alternative price levels in a given time period

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2
Q

What are the 4 major components of aggregate demand?

A

Consumption
Investment
Government spending
Net exports (exports-imports)

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3
Q

State the aggregate demand formula

A

AD=C+I+G+NE

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4
Q

Name some characteristics of C (consumption)

A

C is…..
The largest portion of AD
The most unpredictable portion of AD

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5
Q

Describe what I means in the formula

A

Investment (businesses). Includes items on the shelf in a store

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6
Q

What is consumption?

A

Expenditures by consumers on final goods and services

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7
Q

Consumption accounts for approximately ______ of total spending in the US economy

A

2/3

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8
Q

What is investment?

A

Expenditures on (production of) new plant and equipment in a given time period, plus changes in business inventories

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9
Q

I represents spending by…..

A

Business firms on capital goods like machinery, tools, and equipment

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10
Q

What do businesses want to do?

A

Expand the production possibilities curve

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11
Q

What is government spending?

A

Expenditures on all goods and services provided by the public sector

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12
Q

Are income transfers included in government spending? Why or why not?

A

NO because they are payments to individuals for which no services are exchanged

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13
Q

What is net exports?

A

Difference between export spending and import spending (exports-imports)

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14
Q

Are US net exports positive or negative? Explain

A

Negative because we buy more goods from abroad than foreigners buy from us

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15
Q

Define fiscal policy

A

The use of government taxes and spending to alter alter macroeconomic outcomes. It can be used to STIMULATE or DEPRESS aggregate demand

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16
Q

Is fiscal policy used to shift the AS curve?

A

No——ONLY AD

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17
Q

Does C+I+G+NE usually add up to the right amount of aggregate demand?

A

NO- gov spending and taxes is used to adjust aggregate demand (fiscal policy)

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18
Q

Fiscal policy works principally through…..

A

SHIFTS of the AD curve

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19
Q

What results when AD is too high? (Rightward shift)

A

Inflation

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20
Q

What happens when AD is too low? (Leftward shift)

A

Unemployment

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21
Q

What is the GDP gap?

A

The difference between full employment output and the amount of output demanded at current price levels (equilibrium output)

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22
Q

What is the goal of fiscal policy in relation to the GDP gap?

A

To close it as much as possible

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23
Q

What is another word for after-tax income?

A

Disposable income

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24
Q

What is fiscal stimulus?

A

Increased government spending and lower taxes intended to shift (increase) aggregate demand

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25
Q

Fiscal stimulus is intended to _____ incomes and _____ consumer spending

A

Increase incomes and increase consumer spending

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26
Q

What is the term used to describe the fact that money gets spent and respent in a circular flow?

A

The multiplier effect

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27
Q

With the multiplier effect, ____ initially increases AD. Then, AD increases indirectly by ___ and____

A

Initially - G
Indirectly - C and I

28
Q

All income is either ____ or ____

A

Spent or saved

29
Q

How to calculate savings?

A

Income - consumption

30
Q

Describe a scenario that depicts the multiplier effect

A

Someone makes $100 a week. They get a 10% raise, therefore their disposable income is now $110. They spend that extra $5 buying coffee. The $5 is in the hands of the coffee shop, and they can use some/all of that to buy more ingredients/machines and pay their workers. This money is now in the hands of a coffee shop worker who will then spend it at another store

31
Q

The key to the multiplier effect is that….

A

100% is not spent every time!!!

32
Q

What does MPC stand for?

A

Marginal propensity to consume

33
Q

What does marginal propensity to consume mean?

A

Fraction of each additional dollar of disposable income spent on consumption
(Fraction of income consumed)

34
Q

What does MPS stand for?

A

Marginal propensity to save

35
Q

What does marginal propensity to save mean?

A

Fraction of each additional dollar of disposable income NOT spent on consumption

36
Q

MPC+MPS=

A

1

37
Q

FORMULA FOR MPC

A

CHANGE IN CONSUMPTION/CHANGE IN DI

38
Q

FORMULA FOR MPS (2 potential)

A

1-MPC
Or

MPS=change in saving/change in Di

39
Q

Used to make $100 and spent $25. Now, you make $200 and spend $100
Calculate MPC and MPS

A

100-25/200-100
75/100 = 0.75MPC

100-75/200-100 = 0.25MPS

40
Q

THE MPC IS 0.75. Explain what this means

A

For every additional dollar earned, 0.75 cents is spent

41
Q

Multiplier tells us…..

A

How much total spending will change in response to an initial spending stimulus

42
Q

Formula for multiplier

A

1/(1-MPC)

43
Q

If MPC = 0.75, what is the multiplier?

A

1/1-0.75
1/0.25 = 4

44
Q

The multiplier is 4. Explain what this means?

A

Total spending increased x4
Or…
For every 1$ of gov spending, AD will increase by $4

45
Q

How is the change of spending determined?

A

Multiplier * initial change in gov spending

46
Q

How is the GDP gap closed?

A

By the DIRECT impact of gov spending followed by subsequent increases in consumer spending

47
Q

For the GDP gap to be closed, AD curve shifts to the…..

A

Right

48
Q

Besides government spending, how else can the government increase consumption/investment?

A

Tax cuts

49
Q

A tax cut directly increases……..

A

Disposable income

50
Q

What is disposable income?

A

The after tax income of consumers

51
Q

A tax cut will stimulate more consumer spending as long as….

A

MPC is greater than zero

52
Q

When fiscal stimulus closes the GDP gap, it will also cause…

A

Inflation

53
Q

Explain why fiscal stimulus will also cause inflation

A

The AS curve is upward sloping. Therefore, any increase in AD will raise output and price levels

54
Q

What is fiscal restraint?

A

Bring prices down my moving the AD curve to the left

55
Q

Fiscal restraint is _____ or _____ intended to reduce (shift) aggregate demand

A

Tax hikes or spending cuts

56
Q

When inflation threatens, _______ is used

A

Fiscal restraint

57
Q

If excessive aggregate demand is causing prices to rise, what will the goal of fiscal policy be?

A

To reduce aggregate demand, not stimulate it

58
Q

Fiscal restraint is achieved in 2 ways:

A

Budget cuts (decreased government spending ) or tax hikes

59
Q

Cutbacks in gov spending _____ reduce aggregate demand

A

DIRECTLY

60
Q

The impact of spending cuts is magnified by…..

A

The multiplier

61
Q

Government cutbacks have a ____ effect on aggregate demand

A

Multiplied

62
Q

Tax increases _____ disposable income, thereby _____ consumption and shifting the AD curve to the _______

A

Tax increases LOWER disposable income, thereby REDUCING consumption and shifting the AD curve to the LEFT

63
Q

What is budget deficit?

A

The amount by which government expenditures exceeds government revenue in a given time period.

GOV SPENDING > TAX REVENUES

64
Q

What is budget surplus?

A

An excess of government revenues over government expenditures in a given time period

GOVERNMENT SPENDING < TAX REVENUES

65
Q

PROBLEM: unemployment is too high. What do we want to do to the AD curve and what tools do we have to accomplish this???

A

Shift AD curve to the right. Increased gov spending and tax cuts

66
Q

PROBLEM: inflation. What do we want to do to the AD curve to solve this problem and what tools do we have to accomplish this?

A

Lower AD (shift to the left) decreased gov spending and raise taxes

Pharmoeconomics Exam 2 (5 decks)

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