Chapter 13 - Fiscal Policy

Question 1

Fiscal Policy

Answer 1

Changes in federal taxes or governments expenditures used to achieve macroeconomic policy objectives (refers to federal policy only, not state/local)

Question 2

Two Types of Fiscal Policy

Answer 2

Automatic Stabilizers

Discretionary Fiscal Policy

Question 3

Automatic Stabilizers

Answer 3

Government expenditures that automatically change with the business cycle: the change occurs without any action from the government

Question 4

Discretionary Fiscal Policy

Answer 4

Gov. taking direct actions to change expenditures or taxes.

Question 5

Cyclically Adjusted Budget Deficit

Answer 5

an estimate of what the budget deficit would be if GDP were exactly equal to potential GDP

Question 6

Expansionary Fiscal Policy

Answer 6

Used to close Recessionary Gap. Increases GDP and prices by Shifting AD to right.

1. Increase Gov. Purchases of goods and services
2. Cut Taxes
3. Increase Gov. Transfers

Question 7

Recessionary Gap

Answer 7

occurs when Aggregate output falls below potential output

Question 8

Contractionary Fiscal Policy

Answer 8

Used to close Inflationary Gap. Decreases GDP and prices by shifting AD to the left.

1. Decrease Gov. purchases of good and services
2. Raise Taxes
3. Decrease Gov. Transfers

Question 9

What are limitations of Fiscal Policy

Answer 9

Policy Lags

Crowding Out (only if full employment)

Question 10

Policy Lags

Answer 10

Can take significant amount of time to enact a fiscal policy which can reduce the immediate effectiveness of discretionary fiscal policy

Question 11

Crowding Out

Answer 11

If the gov. pursues expansionary fiscal policy when the economy is not depressed, this can lead to a reduction of private investment in the long run

Question 12

Only changes in Government Purchases lead to direct changes in AD

Answer 12

Not transfers and taxes.

Question 13

Net result on GDP is _____ with change in government spending than with change in transfers

Answer 13

higher

Question 14

Government Spending Multiplier

Answer 14

1/(1-MPC)

Question 15

Tax Rate Multiplier

Answer 15

1/(1-((1-t)*MPC))

Question 16

Lump Sum Tax Multiplier

Answer 16

change in income/ change in tax

Question 17

Expansionary fiscal policy makes a budget deficit _____ or budget surplus ___

Answer 17

Makes a budget deficit bigger and budget surplus smaller.