Chapter 25 Fiscal Policy Flashcards
Federal income tax is an automatic stabilizer because…?
- Once adopted it requires no congressional action to operate after a year so it’s (automatic)
- It reduces the drop in disposable income during recessions and reduces the jump in disposable income during expansions so it’s a stabilizer
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.
Automatic stabilizer
The deliberate manipulation of government purchases taxation, and transfer payments to promote macro economic goals, such as full employment, price stabilization, and economic growth
Discretionary fiscal policy
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
Expansionary fiscal policy
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
Contractionary fiscal policy
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
Classical economists
Law that assigned to the Federal government the responsibility for promoting full employment and price stability
Employment act of 1946
Economic fluctuations that occur when discretionary policy is manipulated for political gain
Political business cycles
Income that individuals expect to receive on average over the long term
Permanent income
At an estimated cost of 831 billion the largest stimulus measure in US history enacted in February 2009
American recovery and reinvestment act
Closing an expansionary gap through fiscal policy rather than through natural market forces results in what type of price level?
A lower price level
Increasing net taxes or reducing government purchases also reduces what?
Reduces government deficit or increases a surplus
What does a contractionary fiscal policy reduce?
Inflation and federal deficit
What does a contractionary fiscal policy aim to do?
Close an expansionary gap
What five things does a proper execution of an expansionary in contractionary fiscal policies assume?
- potential output is accurately gaged 2.the relevant spending multiplier can be predicted accurately
- aggregate demand can be shifted by just the right amount
- various government entities can somehow coordinate their physical efforts
- the shape of the short run aggregate supply curve is known and remains unaffected by the fiscal policy itself
What does the classical approach to economic’s imply?
That natural market forces through flexible prices, wages and interest rates would move the economy towards potential GDP
How do automatic stabilizers smooth out fluctuations in disposable income over the business cycle?
By stimulating aggregate demand during recessions and dampening aggregate demand during expansions
Name three automatic stabilizer
Progressive income tax unemployment insurance and welfare benefits
Who is John Maynard Keynes?
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
Name a demand management policy
Discretionary fiscal policy
What is the objective of a discretionary fiscal policy?
To increase or decrease aggregate demand to smooth economic fluctuations
Why are demand management policies ill-suited to cure stagflation
Because an increase of aggregate demand would increase inflation where is a decrease of aggregate demand would increase unemployment
In the long run what does an expansionary gap create?
A leftward shift in the short run aggregate supply curve
What is the rationale for deficit spending?
Unemployed labor and idle capital would be put to work
What does the effectiveness of any stimulus program depend on?
The size of the tax and spending multiplier’s
The government budget is balanced when…
Government purchases = net taxes
A decrease in taxes other things constant does what?
Increases disposable income at each level of the real GDP so consumption increases
Cutting net taxes does what to the aggregate expenditure line?
Causes it to shift up
