fiscal policy Flashcards
Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, healthy rates of economic growth, and high employment.
taxes; purchases
Fiscal policy refers to the:
spending and taxing policies used by the government to influence the level of economy activity.
he largest source of revenue for the Australian federal government is:
personal income tax.
If the economy is growing beyond potential GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in:
taxes.
An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by:
more than $200b
what is an automatic stabiliser?
a tax or form of government expenditure that has the effect of reducing the size of business cycle fluctuations.
A federal budget deficit acts as an automatic stabiliser because
government tax revenues decrease during a recession
Crowding out results in:
higher interest rates, a higher exchange rate, and lower net exports
The dynamic aggregate demand and aggregate supply model takes into account that
- the economy experiences continuing inflation, with the price level rising every year
- the economy experiences long-run growth, with the LRAS curve shifting to the right every year
To fight economic contractions and recessions the government can:
increase government purchases or cut taxes
expansionary fiscal policy causes the aggregate demand
(AD) curve to
shift to the right by more than it otherwise would, raising the level of real GDP and the price level.
To fight rising inflation, the government can
decrease government purchases or raise taxes
contractionary fiscal policy causes the aggregate demand curve to…
shift to the right by less than it otherwise would, reducing the increase in real GDP and the price level.
Autonomous expenditure is
expenditure that does not depend on the level of real GDP.
Induced expenditure is
expenditure that depends on the level of real GDP.
An autonomous change in expenditure will cause
rounds of induced changes in expenditure. Therefore, an autonomous change in expenditure will have a multiplier effect on equilibrium GDP
The ________ is the process by which an increase in autonomous expenditure leads to a larger increase in real GDP.
multiplier effect
is the ratio of the change in equilibrium GDP to the change in autonomous expenditure.
the multiplier
Because of the multiplier effect, an increase in government purchases or a cut in taxes will have a multiplied effect on
equilibrium real GDP.
The government purchases multiplier is equal to the
change in equilibrium real GDP divided by the change in government purchases
The tax multiplier is equal to the change in equilibrium real GDP divided by the change in
taxes
Increases in government purchases and cuts in taxes have a _____ multiplier effect on equilibrium real GDP
Positive
Decreases in government purchases and increases in taxes
have a negative multiplier effect on equilibrium real GDP.
what is crowding out
A decline in private expenditure as a result of an increase in government purchases
A budget deficit occurs when the federal government’s expenditures are
greater than its tax revenues
________ occurs when the federal government’s expenditures are less than its tax revenues.
budget surplus
A budget deficit automatically ________ during economic contractions and recessions and ______ during economic expansions and booms.
increases
Decreases
Government net debt is the difference between the amount of
funds the government borrows and the amount it lends
The automatic movements in the federal budget help to stabilise the economy by
cushioning the fall in spending during contractions and recessions and restraining the increase in spending during expansions and booms.
the structural budget defecit or surplus measures…
what the deficit or surplus would be if the economy were at potential GDP.
Some fiscal policy actions are intended to have long-run effects by
expanding the productive capacity of the economy and increasing the rate of economic growth
Because these policy actions primarily affect aggregate ____ rather than aggregate ______, they are sometimes referred to as _________
supply
demand
supply-side policies
The difference between the pre-tax and post-tax return to an economic activity is known as the
tax wedge
