Chapter 18

Question 1

What is fiscal policy?

Answer 1

The Federal govt policy on taxes, spending, and borrowing

Designed to influence business fluctuations

Question 2

What are the components of aggregate demand?

Answer 2

C, I, G, NX

Question 3

What is crowding out?

Answer 3

the decrease in provate consumption and investment that occurs when government borrows more; also the decrease in private spending when government increases spending

Question 4

What are 4 major limits to fiscal policy?

Answer 4

1. Crowding out
2. A drop in the bucket
3. A matter of timing
4. Real shocks

Question 5

When is the case for fiscal policy the strongest?

Answer 5

When the economy is in a recession caused by low aggregate demand

Question 6

Government spending shifts the aggregate demand curve to the…

Answer 6

right

Question 7

What is the multiplier effect?

Answer 7

The additional increase in AD caused when expansionary fiscal policy
increases income and thus consumer spending.

Question 8

A tax cut or tax rebate puts more spending in the hands of who?

Answer 8

The private sector

Question 9

An increase in government spending puts more spending in the hands of who?

Answer 9

The government

Question 10

Describe the crowding out limit to fiscal policy

Answer 10

Government spending leads to less private spending, reducing the increase in AD.

Question 11

Describe the drop in the bucket limit to fiscal policy

Answer 11

The economy is so large that government can rarely increase spending enough to have a large impact.

Question 12

Describe the matter of timing limit to fiscal polciy

Answer 12

It can be difficult to time fiscal policy so that AD shifts at the right time.

Question 13

What two ways is increased spending paid for?

Answer 13

1. Raising taxes

2. Borrow more(sell bonds)

Question 14

What are 2 types of expansionary fiscal policy?

Answer 14

1. Increased spending

2. Tax Cuts

Question 15

How are tax cuts paid for?

Answer 15

Borrowing more(selling bonds)

Question 16

When the new government spending is financed by increased taxes, individuals have ______ money to spend.

Answer 16

less

Question 17

When people are otherwise afraid to spend their money, fiscal policy will be most..

Answer 17

effective

Question 18

If people buy more government bonds but fewer private bonds, then growth in investment..

Answer 18

declines

Question 19

To sell more bonds, the government must offer a higher …

Answer 19

interest rate

Question 20

Selling more bonds reduces..

Answer 20

private investment and private consumption

Question 21

To increase the incentive to invest or work, the govt must cut marginal tax..

Answer 21

rates

Question 22

What is ricardian equivalence?

Answer 22

Occurs when people see that lower taxes today means higher taxes in the future, so instead of spending their tax cut, they save it to pay future taxes. When Ricardian equivalence holds, a tax cut doesn’t increase aggregate demand even
in the short run.

Question 23

What are the potential lags?

Answer 23

1. Recognition lag
2. Legislative lag
3. Implementation lag
4. Effectiveness lag
5. Evaluation and adjustment lag

Question 24

What are automatic stabilizers?

Answer 24

Changes in fiscal policy that stimulate AD in a recession without the need for explicit action by policymakers.

Question 25

When is fiscal policy less effective?

Answer 25

If a contraction in the economy is due to a real shock

Question 26

In what 3 situations is fiscal policy most likely to matter?

Answer 26

1. When the economy needs a short-run boost, even at the expense of the long run.
2. When the problem is a deficiency in aggregate
   demand rather than a real shock.
   3.When many resources are unemployed.

Question 27

What is recognition lag?

Answer 27

The problem must be recognized

Question 28

What is legislative lag?

Answer 28

Congress must propose and pass a plan

Question 29

What is implementation lag?

Answer 29

Beauracies must implement a plan

Question 30

What is effectiveness lag?

Answer 30

The plan takes time to work

Question 31

What is evaluation and adjustment lag?

Answer 31

Did the plan work?Have conditions changed?