Chapter 24 - The Government and Fiscal Policy

Question 1

fiscal policy

Answer 1

The government’s spending and taxing policies.

Question 2

monetary policy

Answer 2

The behavior of the Federal Reserve concerning the nation’s money supply.

Question 3

discretionary fiscal policy

Answer 3

Changes in taxes or spending that are the result of deliberate changes in government policy.

Question 4

net taxes (T)

Answer 4

Taxes paid by firms and households to the government minus transfer payments made to households by the government.

Question 5

disposable, or after-tax, income (Y-sub(d))

Answer 5

Total income minus net taxes: Y - T.

Question 6

budget deficit

Answer 6

The difference between what a government spends and what it collects in taxes in a given period: G - T.

Question 7

government spending multiplier

Answer 7

The ratio of the change in the equilibrium level of output to a change in government spending.

Question 8

tax multiplier

Answer 8

The ratio of change in the equilibrium level of output to a change in taxes.

Question 9

balanced-budget multiplier

Answer 9

The ratio of change in the equilibrium level of output to a change in government spending where the change in government spending is balanced by a change in taxes so as not to create any deficit. The balanced-budget multiplier is equal to 1: The change in Y resulting from
the change in G and the equal change in T are exactly the same size as the initial change in G or T.

Question 10

federal budget

Answer 10

The budget of the federal government.

Question 11

federal surplus (+) or deficit (-)

Answer 11

Federal government receipts minus expenditures.

Question 12

federal debt

Answer 12

The total amount owed by the federal government.

Question 13

privately held federal debt

Answer 13

The privately held (non-government-owned) debt of the U.S. government.

Question 14

automatic stabilizers

Answer 14

Revenue and expenditure items in the federal budget that automatically change with the state of the economy in such a way as to stabilize GDP.

Question 15

automatic destabilizer

Answer 15

Revenue and expenditure items in the federal budget that automatically change with the state of the economy in such a way as to destabilize GDP.

Question 16

fiscal drag

Answer 16

The negative effect on the economy that occurs when average tax rates increase because taxpayers have moved into higher income brackets during an expansion.

Question 17

full-employment budget

Answer 17

What the federal budget would be if the economy were producing at the full-employment level
of output.

Question 18

structural deficit

Answer 18

The deficit that remains at full employment.

Question 19

cyclical deficit

Answer 19

The deficit that occurs because of a downturn in the

business cycle.

Question 20

Disposable income

Answer 20

Y-(sub d) (=–) Y - T

Question 21

AE

Answer 21

AE (=–) C + I + G

Question 22

Government budget deficit

Answer 22

Government budget deficit (=–) G - T

Question 23

Equilibrium in an economy with a government

Answer 23

Equilibrium in an economy with a government: Y= C + I + G

Question 24

Saving/investment approach to equilibrium in an economy with a government

Answer 24

Saving/investmentapproachto equilibrium in an economy with a government: S + T =I + G

Question 25

Government spending multiplier

Answer 25

Government spending multiplier (=–) 1/MPS

Question 26

Tax multiplier

Answer 26

Tax multiplier (=–) - (MPC / MPS)

Question 27

Balanced-budget multiplier

Answer 27

Balanced-budget multiplier (=–) 1