Chapter 13.3

Question 1

Sources of government revenue

Answer 1

Taxes of all types
Sale of goods and services
Sale of government-owned assets or property

Question 2

Types of government expenditure

Answer 2

Current expenditures
Capital expenditures
Transfer payments

Question 3

Current expenditure

Answer 3

The government’s spending on day-to-day items that are recurring and items that are consumed as a good or service is provided

Question 4

Capital expenditure

Answer 4

Public investments or spending to produce physical capital

Question 5

Transfer payments

Answer 5

Payments made by the government to vulnerable groups for the purposes of income redistribution

Question 6

Fiscal policy

Answer 6

Manipulations by the government of its own expenditure and taxes to influence the level of aggregate demand

Question 7

Goals of fiscal policy

Answer 7

Low and stable rate of inflation
Low unemployment
Reduce business cycle fluctuations
Promote a stable economic environment for long-term growth
External balance
Equitable distribution of income

Question 8

Expansionary fiscal policy

Answer 8

Fiscal policies that work to expand aggregate demand and the level of economic activity

Question 9

Contractionary fiscal policy

Answer 9

Fiscal policies that work to contract aggregate demand and the level of economic activity

Question 10

What does fiscal policy do?

Answer 10

Uses manipulations by the government to its own expenditures and taxes to influence the G, C or I components of aggregate demand

Question 11

When can expansionary fiscal policy be used?

Answer 11

When there is a recessionary gap, and the government aims to shift the AD curve to the right

Question 12

When can contractionary fiscal policy be used?

Answer 12

When there is an inflationary gap, and the government aims to shift the AD curve to the left

Question 13

Constraints on fiscal policy

Answer 13

Problems of time lags
Political constraints
Sustainable debt
Tax cuts might not be very effective in increasing AD in a recession
Inability to fine tune the economy
May be inflationary
Inability to deal with stagflation
Crowding out

Question 14

Crowding out

Answer 14

When the government increases expenditure without increasing revenue, forcing them to borrow and increase the interest rate. This will lower investment spending, and the increase of AD is diminished

Question 15

Strengths of fiscal policy

Answer 15

Able to pull an economy out of a deep recession
Able to target sectors of the economy
Direct impact of government spending on aggregate demand
Can deal with rapid and escalating inflation
Able to affect potential output
Automatic stabilizers

Question 16

Automatic stabilizers

Answer 16

Factors that automatically work towards stabilizing the economy by reducing short-term fluctuations of the business cycle

Question 17

Examples of automatic stabilizers

Answer 17

Progressive taxation
Unemployment benefits