Chapter 13

Question 1

Economic activity by gov in GDP

Answer 1

major role in GDP, spends lots of money collects lots of taxes

Question 2

Business cycle and flow of funds for GOV

Answer 2

In as taxes and borrowing, out as transfers and purchases of g/s

Question 3

3 levels of tax collectors

Answer 3

federal, provincial, municiple

Question 4

how does government fund programs

Answer 4

through transfers

Question 5

government transfers

Answer 5

payments to households for which no good or service is provided in return

Question 6

social insurance programs and 3 examples

Answer 6

government programs intended to protect families from economic hardship

• public pension
• old age security
• guaranteed income supplement

Question 7

examples of government expenses

Answer 7

salary, roads, construction, buildings, goods and services purchased

Question 8

Governments role in GDP equation

Answer 8

• directly controls government spending G

- indirectly affects C and I

Question 9

How is C and I affected by governments

Answer 9

C is affected by taxes and transfers

I is affected by taxes and regulations

Question 10

Consumer Disposable Income and Government

Answer 10

increase in gov spending, decrease in tax and increase in transfer increase disposable income which increase consumer spending and investment, vice versa

Question 11

Fiscal Policy how can government shift AD curve

Answer 11

can shift aggregate demand curve by changing taxes, spending, and transfers

Question 12

Expansionary Fiscal Policy

Answer 12

increase AD to close recessionary gap and expand output to potential: increase in G and TR and reduce in T

Question 13

Contractionary Fiscal Policy

Answer 13

decreased AD curve to close inflationary gap and decrease output to potential: increase in T and decrease in TR and G

Question 14

False claims against expansionary fiscal policy (3)

Answer 14

gov spending always crowds out private spending
gov borrowing always crowds out private investment spending
gov budget deficit reduce private spending

Question 15

why is “gov spending always crowds out private spending” false and when would it be true

Answer 15

would be true if at full employment as every extra dollar spent takes away from firm and consumer

false because during recession puts unemployed to work to generate higher income and spending which increase production

Question 16

why is “gov borrowing always crowds out private investment spending” false and when is it true

Answer 16

true if economy at full employment as increase gov borrowing will create less funds available, and increase interest rate

false during recession, fiscal expansion leads to higher incomes which increase savings and lower interest rate. Gov can borrow as demand for loanable funds is low

Question 17

why is “gov budget deficit reduce private spending false”

Answer 17

expansionary policy leads to increase taxes, and there is no way every consumer will predict when taxes are increasing and cut spendings, most consumers will still spend when given extra cash while saving overtime.

Question 18

Legitimate concerns of fiscal policy

it takes time to ______ (3)

Answer 18

The time lags between policy and implementation

1. realize the output gap
2. create plan to solve the problem
3. implement the action plan

Question 19

what may happen if an expansionary fiscal policy is created too late

Answer 19

economy would have already self corrected itself back to LR equilibrium output then the fiscal expansionary would create inflationary gap

Question 20

who gets tax cuts and who gets transfers in an economy

Answer 20

depends on the marginal propensity to consume, typically unemployed or low class citizens have higher MPC rate therefore due to multiplier aids to GDP the most

Question 21

Lump-sum taxes

Answer 21

taxes that do not depend on the tax payer’s income so no impact on mpc or multiplier ex we all pay 100$

Question 22

Non Lump-sum taxes

Answer 22

taxes that depend on taxpayer’s income

• effect multiplier as effects consumers mpc
• as GDP increases, taxes increases do to change in disposable income

Question 23

some income leaks as taxes so changes multiplier size, what is the formula

Answer 23

multiplier= 1/(1-(MPCx(1-t)) where t is tax rate

Question 24

Automatic stabilizers- what are they, the form they take what do they prevent? How do they affect the multiplier

Answer 24

Automatic expansionary and contractionary policy in form of taxes and transfers due to a recession or inflation. They decrease the severity of a supply/demand shock, decrease the multiplier

more information on slide 22

Question 25

discretionary fiscal policy

Answer 25

deliberate actions of policy makers by legislation of tax cuts, increase in spending and transfers (vice-versa) to stimulate economy if automatic is not working

Question 26

Austerity and effect on GDP and relationship to contractionary fiscal policy

Answer 26

sharp cuts in spending plus tax increase,

negative relationship so there is a link between contractionary policy and decline in GDP output

Question 27

Budget Balance equation plus positive or negative

Answer 27

budget balance=T-G-TR
surplus if positive T>G&TR
deficit if negative, G&TR>T

Question 28

Discretionary expansionary fiscal policies _____ budget balance for that year. What happens to deficit or surplus?

Answer 28

reduce therefor budget deficit gets larger or surplus gets smaller

Question 29

Discretionary contractionary fiscal policies _____ budget balance for that year. What happens to deficit or surplus?

Answer 29

increase therefor budget deficit gets smaller or surplus gets larger

Question 30

Budget Balance and relation to business cycle and unemployment

Answer 30

during recession, high unemployment and high deficit

during expansion, low unemployment and low deficit or even surplus.

Question 31

Cyclically adjusted budget balanced and what is it used for

Answer 31

budget balance estimate if economy were at potential output and to separate effects of business cycle from discretionary fiscal policy

Question 32

relation of cyclical and actual budget balance graphically

Answer 32

cyclical doesn’t fluctuate as much as actual therefore deficits are due to depressed economy, not expansionary fiscal policy

Question 33

why shouldn’t the budget be balanced every year

think about effect of recession and inflation and the stabilizers

Answer 33

automatic stabilizers help control the effect and severity of a recession and inflation, balance budget would make either worse. The surplus is good times should offset the deficit in bad times, so it is balance on average

Question 34

Give an example of how a balanced budget in a recession would be worse

Answer 34

during a recession gov loses tax revenue, in order to balance they would have to cut their spending which decreases consumer spending making the recession worse

Question 35

persistent deficit can create government and public _____

Answer 35

debt

Question 36

deficit

Answer 36

difference between what gov spends and its tax revenue

Question 37

debt and what is it created by?

Answer 37

sum of money a government owes at a particular time, created by accumulation of deficit

Question 38

debt to GDP ratio graphically how it rises and falls

Answer 38

rises because of accumulation of deficit and GDP is growing slower, falls if deficit is growing slower then GDP of economy

Question 39

Problems of rising government debt and descriptions (3)

Answer 39

1. crowding out: keeps borrowing from financial market creating less funds available for HH and firms
2. financial pressure and default: can’t pay back debt
3. Higher interest payments as lack of confidence to pay back

Question 40

Implicit Liabilities and example

Answer 40

debts that government must pay at a future date ex health care, pensions,

Question 41

how to curb implicit liabilities such as high life expectancy and aging population

Answer 41

• immigration of young people to boost labour force participation rate
• use funds more efficiently
• reform government funding models
• raise taxes