Chapter 16 - Fiscal Policy Flashcards
What is the cumulative sum of all annual deficits?
Debt
List the two policies that the government uses to try and affect the economy
- Monetary policy
2. Fiscal policy
Which policy uses the money supply to influence the economy?
Monetary policy
Which policy uses government spending and taxes to influence the economy?
Fiscal policy
What occurs when the government increases spending or decreases taxes?
Expansionary fiscal policy
Do we implement expansionary fiscal policy during a recession or during an expansion?
Recession
Will the expansionary fiscal policy shift the aggregate demand curve to the left or to the right?
The right
What is the goal of expansionary fiscal policy?
To return the economy back to full employment without having to wait for long-term adjustments
What was the goal of the Economic Stimulus Act 2008?
To increase consumption and stimulate the economy
What was the goal of the American Recovery and Reinvestment Act 2009?
To increase aggregate demand
What did the Economic Stimulus Act 2008 focus on?
Taxes
What did the American Recovery and Reinvestment Act 2009 focus on?
Government spending
Which of the following is an example of expansionary fiscal policy? A. increase in taxes B. stimulus package C. increasing the money supply D. lowering interest rates
B. stimulus package
How are the increases in government spending or the decreases in taxes paid for?
Borrowing
What does expansionary fiscal policy lead to an increase in?
Deficit
Do we implement contractionary fiscal policy during a recession or during an expansion?
Expansion
What occurs when the government decreases spending or increases taxes?
Contractionary fiscal policy
Does contractionary fiscal policy expand or reduce aggregate demand?
It reduces
List the two reasons why the government wants to use contractionary fiscal policy in order to reduce aggregate demand
- It will pay off the debt that we accumulated do to expansionary fiscal policy
- It will slow down an economy that is “overheated” from too much spending
What will an “overheated” economy lead to?
Inflation
What is the goal of contractionary fiscal policy and expansionary fiscal policy?
It wants to reduce the ups and downs of the business cycles
Which of the following is an example of contractionary fiscal policy? A. decreasing the money supply B. increasing the interest rate C. increasing government spending D. increasing taxes
D. increasing taxes
What is a fiscal policy that seeks to counteract business-cycle fluctuations?
Countercyclical Fiscal Policy
What is the goal of countercyclical fiscal policy?
To smooth out the fluctuations in a business cycle
What provided the foundation for countercyclical fiscal policy?
Keynesian theory
What is the portion of additional income that is spent on consumption?
Marginal propensity to consume
What is the marginal propensity to consume equation?
MPC = the change in consumption/ the change in income
What theory states that lower real GDP and higher unemployment are caused by lack of spending in the economy?
Keynesian theory
True or False:
MPC isn’t constant across all people
True
What is a formula to determine the total impact on spending from an initial change of a given amount?
Spending formula
What is the spending multiplier formula?
1 / (1 - MPC)
Suppose the MPC is 0.9. What will the total GDP impact be of a $400 billion increase in government spending [G]? A. $360 billion B. $760 billion C. $1 trillion D. $4 trillion
D. $4 trillion
What are the three issues that arise with fiscal policy?
- Time lags
- Crowding out
- Savings adjustments
List the three lags that accompany policy decisions
- Recognition lag
- Implementation lag
- Impact lag
What is the time it takes to recognize when we are in trouble?
Recognition lag
What is the time it takes for the new policy to be implemented?
Implementation lag
What three things cause the recognition lag?
- GDP data is released quarterly and revised later
- Unemployment rate data lags even further
- Growth is not constant
What causes the implementation lag?
It takes time for fiscal policy to pass legislation
What is the time it takes for a fiscal policy to materialize?
Impact lag
If the effects of expansionary fiscal policy hit when the economy is already expanding, what might the effects lead to?
Excessive aggregate demand and inflation
If contractionary fiscal policy is implemented with delays, what might the effects lead to?
A recession
What is one program that can alleviate the lagging problem?
Automatic stabilizers
What are the government programs that implement countercyclical fiscal policy in response to economic conditions?
Automatic stabilizers
What guarantees that tax bills will fall when incomes fall and rise when incomes rise?
Progressive income tax rates
What lowers the total tax bills when profits are lower and raises them when profits are higher?
Corporate profit taxes
What increases government spending automatically when the number of unemployed rises?
Unemployment compensation
What increases government spending during downturns and decreases government spending when the economy is doing better?
Welfare programs
Which of the following is an example of an automatic stabilizer? A. Federal Reserve interest rates B. discretionary outlays C. progressive income taxes D. education subsidies
C. progressive income taxes
What happens when individuals let federal spending substitute for their own spending?
Crowding out
Every dollar of government spending crowds out a dollar of private spending
(Point of reference)
What occurs when individuals start saving more money after the government increases spending or decreases taxes?
Saving shift
What involves the use of government spending and taxes to affect the production side of the economy?
Supply-Side Fiscal Policy
Which curve does the supply-side fiscal policy shift?
LRAS curve
Shifts in the LRAS curve are do to changes in what?
Resources, technology, and institutions
What are the 4 supply-side fiscal policy initiatives?
- R&D tax credits
- Policies that focus on education
- Lower corporate profit tax rates
- Lower marginal income tax rates
What is the income tax revenue equation?
Tax rate x income
What illustrates the relationship between tax rates and tax revenue?
The Laffer curve
What do Democrats think about the relationship between tax rates and tax revenue?
They believe that an increase in tax rates will lead to an increase in tax revenue
What do Republicans think about the relationship between tax rates and tax revenue?
They believe that an increase in tax rates will lead to a decrease in tax revenue
As an elected official, you have been informed that real GDP is below its potential and that action should be taken to encourage economic growth and bring the economy to its long-run equilibrium. If the marginal propensity to consume is 0.8 and the amount of new government spending is $600 billion, by how much would the economy be stimulated? A. $480 billion B. $600 billion C. $3,000 billion D. $300 billion
C. 300 billion
During the fall of 2007, the United States economy began a descent into deep recession. As a result, the federal government and the Federal Reserve took action to stimulate economic growth. Which of the following would have been an appropriate fiscal policy?
A. the Federal Reserve increasing the money supply to reduce the interest rate
B. the federal government increasing marginal tax rates
C. the federal government increasing its regulation of banks
D. the federal government spending more money to build more infrastructure
D. the federal government spending more money to build more infrastructure
In a bid to be re-elected, you promise both a lower tax rate and greater tax revenue. You would only be able to back up your answer if:
(Use the Laffer curve to support your answer.)
A. the current tax rate is in Region I of the Laffer curve.
B. if the current tax rate is in Region II of the Laffer curve.
C. the current tax rate is in either region on the Laffer curve.
D. if the current tax rate is exactly t*, at the midpoint of the Laffer curve.
B. if the current tax rate is in Region II of the Laffer curve.
Suppose that the president has decided to increase government spending by building more libraries. The legislation was rushed through Congress and enacted without any delay. From here, the libraries will take 10 months to plan and 2 years to build.
Which of the following is true?
A. The planning and building of the libraries represents an impact lag of this policy.
B. The planning and building of the libraries represents a recognition lag of this policy.
C. This policy shows an example of automatic stabilizers taking effect.
D. This policy is contractionary.
A. The planning and building of the libraries represents an impact lag of this policy.
The new classical critique of activist fiscal policy is theoretically different from the crowding-out critique. Crowding-out occurs when private spending \_\_\_\_\_\_\_\_\_\_ in response to government spending. Under the new classical critique, increased government spending leads people to \_\_\_\_\_\_\_\_\_\_ their current savings in order to help pay for higher taxes in the future, which increases the \_\_\_\_\_\_\_\_\_\_ of loanable funds. A. decreases; decrease; supply B. increases; increase; demand C. decreases; decrease; demand D. decreases; increase; supply
D. decreases; increase; supply
When fiscal policy is used to manage the economy, there are a number of factors that can delay its impact.
Which of the following is an example of a recognition lag?
A. After the policy takes effect, it takes time for its complete effects to ripple through the economy.
B. After an elected official proposes to spend more money to stimulate economic growth, it takes time for other elected officials to agree and take action.
C. After a law is passed that authorizes government spending, the bureaucracy within the government needs time to set up needed processes and procedures, and to identify areas that have the greatest need for federal spending.
D. Although economic conditions seem bad enough to warrant government action, it takes time for economists to confirm that conditions are bad enough.
D. Although economic conditions seem bad enough to warrant government action, it takes time for economists to confirm that conditions are bad enough.
When the economy is in a recession, expansionary fiscal policy can be used to stimulate and encourage economic growth. Which of the following scenarios represent expansionary fiscal policies from both a supply and demand perspective at the same time?
A. The government lowers tax rates.
B. The government lowers tax rates and issues a partial refund of taxes that have already been paid.
C. The government raises tax rates and reduces unemployment insurance payments.
D. The Federal Reserve decreases the money supply and raises the interest rate while the government simultaneously reduces future taxes.
D. The Federal Reserve decreases the money supply and raises the interest rate while the government simultaneously reduces future taxes.
Which of the following proposals is not likely to shift the aggregate supply curve?
A. An increase in social security payments
B. A 5% reduction in tax rates for those in the top 0.000001% of the income distribution
C. Pell Grants, which are government subsidies for college education
D. A change in the supplier of school lunches at public schools
C. Pell Grants, which are government subsidies for college education
Which of the following statements is true?
A. Contractionary fiscal policy will lead to an increase in government debt
B. Contractionary fiscal policy is used to stimulate an economy, and eliminate contractions
C. Contractionary fiscal policy can prevent an economy from overheating
D. Contractionary fiscal policy will lead to runaway inflation
C. Contractionary fiscal policy can prevent an economy from overheating
Which of the following statements is true?
A. The Obama stimulus of 2009 had the same amount of funding as the Bush package
B. The Obama stimulus package of 2009 had significantly less funding than the Bush 2008 package
C. The Obama stimulus package of 2009 had significantly more funding than the Bush 2008 package
D. The Obama stimulus package of 2009 only favored rich people
C. The Obama stimulus package of 2009 had significantly more funding than the Bush 2008 package
Do practice problems from chapter
*
- R&D tax credits increase technology
- Policies that focus on education increase effective labor resources
- Lower corporate profit tax rates increase efficiency
- Lower marginal income tax rates increase labor productivity
*
Will the contractionary fiscal policy shift the aggregate demand curve to the left or to the right?
The left
