Chapter 25 Fiscal Policy

Question 0

Federal income tax is an automatic stabilizer because…?

Answer 0

1. Once adopted it requires no congressional action to operate after a year so it’s (automatic)
2. It reduces the drop in disposable income during recessions and reduces the jump in disposable income during expansions so it’s a stabilizer

Question 1

Revenue and spending programs in the fed budget that automatically adjust with ups and downs of the economy to stabilize disposable, consumption and real GDP.

Answer 1

Automatic stabilizer

Question 2

The deliberate manipulation of government purchases taxation, and transfer payments to promote macro economic goals, such as full employment, price stabilization, and economic growth

Answer 2

Discretionary fiscal policy

Question 3

An increase in government purchases decrease in net taxes or some combination of the two aimed at increasing aggregate demand enough to reduce unemployment and return the economy to its potential output fiscal policy use to close a recessionary gap

Answer 3

Expansionary fiscal policy

Question 4

A decrease in government purchases increase in net taxes or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation fiscal policy use to close and expansionary gap

Answer 4

Contractionary fiscal policy

Question 5

A group of 18th and 19th century economists Who believed that economic downturns corrected themselves through natural market forces that they believed the economy was self-correcting and needed no government intervention

Answer 5

Classical economists

Question 6

Law that assigned to the Federal government the responsibility for promoting full employment and price stability

Answer 6

Employment act of 1946

Question 7

Economic fluctuations that occur when discretionary policy is manipulated for political gain

Answer 7

Political business cycles

Question 8

Income that individuals expect to receive on average over the long term

Answer 8

Permanent income

Question 9

At an estimated cost of 831 billion the largest stimulus measure in US history enacted in February 2009

Answer 9

American recovery and reinvestment act

Question 10

Closing an expansionary gap through fiscal policy rather than through natural market forces results in what type of price level?

Answer 10

A lower price level

Question 11

Increasing net taxes or reducing government purchases also reduces what?

Answer 11

Reduces government deficit or increases a surplus

Question 12

What does a contractionary fiscal policy reduce?

Answer 12

Inflation and federal deficit

Question 13

What does a contractionary fiscal policy aim to do?

Answer 13

Close an expansionary gap

Question 14

What five things does a proper execution of an expansionary in contractionary fiscal policies assume?

Answer 14

1. potential output is accurately gaged 2.the relevant spending multiplier can be predicted accurately
2. aggregate demand can be shifted by just the right amount
3. various government entities can somehow coordinate their physical efforts
4. the shape of the short run aggregate supply curve is known and remains unaffected by the fiscal policy itself

Question 15

What does the classical approach to economic’s imply?

Answer 15

That natural market forces through flexible prices, wages and interest rates would move the economy towards potential GDP

Question 16

How do automatic stabilizers smooth out fluctuations in disposable income over the business cycle?

Answer 16

By stimulating aggregate demand during recessions and dampening aggregate demand during expansions

Question 17

Name three automatic stabilizer

Answer 17

Progressive income tax unemployment insurance and welfare benefits

Question 18

Who is John Maynard Keynes?

Answer 18

From Cambridge University of England published the general theory of employment interest and money a book that challenged the classical view and touch off what would later be called the Keynesians revolution

Question 19

Name a demand management policy

Answer 19

Discretionary fiscal policy

Question 20

What is the objective of a discretionary fiscal policy?

Answer 20

To increase or decrease aggregate demand to smooth economic fluctuations

Question 21

Why are demand management policies ill-suited to cure stagflation

Answer 21

Because an increase of aggregate demand would increase inflation where is a decrease of aggregate demand would increase unemployment

Question 22

In the long run what does an expansionary gap create?

Answer 22

A leftward shift in the short run aggregate supply curve

Question 23

What is the rationale for deficit spending?

Answer 23

Unemployed labor and idle capital would be put to work

Question 24

What does the effectiveness of any stimulus program depend on?

Answer 24

The size of the tax and spending multiplier’s

Question 25

The government budget is balanced when…

Answer 25

Government purchases = net taxes

Question 26

A decrease in taxes other things constant does what?

Answer 26

Increases disposable income at each level of the real GDP so consumption increases

Question 27

Cutting net taxes does what to the aggregate expenditure line?

Answer 27

Causes it to shift up