Exam 3 - Chapter 13 Flashcards
True or False: The financial market (AD and AS) will correct itself in the long-run if the government fails to correct itself.
True
When government uses Fiscal Policy to affect AD:
Government spending affects _– of AD
Tax policies affect ___ of AD
Gov. Spending affects “G”
Tax Policies affect “Consumption and Investments”
Why should the government use Fiscal Policy to correct a market where GDP is above Potential GDP?
Because markets can expand too rapidly
*Housing market bubble of 2000s
3 limitations to Fiscal Policy?
- Fiscal Policy is educated guess
- Public Debt
- Time lag (takes long for fiscal policy to do its work to correct a market)
What are 3 reasons why Time Lags exist? (a limitation of Fiscal Policy)
- Formulation lag
- Information lag
- Implementation lag
___ are taxes and government spending that affect fiscal policy without specific action from policy-makers.
Automatic stabilizers
The ___ is the increase in consumer spending that occurs when spending by one person causes others to spend more too.
multiplier effect
Disposable Income?
Income left after people pay taxes on it
Consumption is based on ___
Disposable Income
The amount consumption increases when disposable income increases by $1 is called the ___
MPC
The ___ is the amount that GDP increases when government spending increases by $1
government-spending multiplier
Formula for Government Spending Multiplier?
1 / (1 - MPC)
The ___ is the amount that GDP decreases by when taxes increase by $1.
Taxation Multiplier
How does cutting taxes increase GDP?
Increases GDP indirectly through Consumption
Formula for Taxation Multiplier?
- MPC / (1 - MPC)
* that’s a negative sign infront of MPC ^^^
According to the multiplier effect, which is stronger:
Tax Cuts or Government Spending
Government Spending stronger than Tax Cuts
*inc Gov. Spending has greater effect on GDP than inc in Tax Cuts
___ is when increases in government spending crowds out private investments.
Crowding-out Effect
According to the Crowding-out Effect, how exactly does an increase in Government Spending drive private investments down?
Increase in Government Spending results in: Increase in Interest Rates
Increase in Interest Rates results in:
decrease in private borrowing(private investments)
What are the two parts to Budget Deficit?
Receipts and Outlays
___ are tax revenues and other revenues
Receipts (part of Budget Deficit)
___ are transfer payments + government spending
Outlays (part of Budget Deficit)
___ are payments from the government to individuals for programs that don’t involve a purchase of goods or services.
Transfer Payments
If outlays exceed receipts there is a ___
If revenues exceed expenditures there is a ___
Budget Deficit
Budget Surplus
What are two advantages to Government Debt?
- allows government to be flexible when unexpected things happen
- gov. can buy investments which lead to economic growth
How is National Debt calculated?
Public Deficit + Debt of Government Agencies
Direct cost of Government Debt is ___
Indirect cost of Government Debt is ___
Direct - interest expense of borrowing money
Indirect - as gov. debt increases, interest rates increase resulting in decrease of private investments (Crowding-out Effect)
Changing Mandatory Outlays and Discretionary Outlays?
Mandatory Outlays
-requires long-run changes to pre-existing laws
(social security, medicare)
Discretionary Outlays
-can be changed when annual budget is set
(roads, payments to government workers, bridges, defense)