Fiscal Policy

Question 1

John Keynes

Answer 1

Explained how deficiency in demand could arise in a market economy

Showed how and why gov’t should intervene to achieve macroeconomic goals.

Advocated aggressive use of fiscal policy to alter market outcomes

Question 2

Aggregate demand

Answer 2

The total quantity of output demanded at alternative price levels given in a time period, ceteris paribus

Question 3

4 major components of aggregate demand are

Answer 3

Consumption C
Investment I
government spending G
Net exports (exports minus import) (x-IM)

Question 4

Aggregate demand equation

Answer 4

A= C + I +G + (X -IM)

Question 5

Total spending

Answer 5

14 trillion

Largest is government spending

Question 6

Consumption. C

Answer 6

Refers to expenditures by consumers on final goods and services

Consumption spending accounts for approximately two thirds of total spending in U. S economy

Consumers often change their spending behavior

Question 7

Investment

Answer 7

Refers to expenditures on production of new plant and equipment in a given time period, plus changes in business inventories

Question 8

Government spending includes

Answer 8

expenditures on all goods and services provided by the public sector

Does not include income transfers

Question 9

U.S. Net exports are

Answer 9

Negative

Question 10

If AD falls short

Answer 10

There is a gap between what the economy can produce and what people want to buy

Question 11

GDP gap

Answer 11

The difference between full-employment output and the amount of output demanded at current price levels

Question 12

Fiscal stimulus

Answer 12

Tax cuts or spending hikes intended to increase (shift ) aggregate demand

Increased government spending

To help with 2008-9 recession Obama created huge increase in gov’t spending

Question 13

Saving equation

Answer 13

Income minus consumption

The part of disposable income not spent

Question 14

Marginal propensity to consume equation

Answer 14

MPC = Change in Consumption/ change in disposable income

Question 15

Marginal propensity to save equation

Answer 15

MPS = change in saving/ change in disposable income

Question 16

How MPS AND MPC are connected

Answer 16

MPS = 1- MPC

Or

MPC +MPS = 1

Question 17

Multiplier formula

Answer 17

Multiplier = 1/ (1-MPC)

The total change in spending= multiplier x initial change in gov’t spending

Question 18

Fiscal restraint

Answer 18

Tax hikes or spending cuts intend to reduce (shift) aggregate demand

Question 19

Budget deficit

Answer 19

The amount by which government expenditures exceeds government revenues I a given time period

Budget deficit= government spending > tax revenues

Question 20

Budget surplus

Answer 20

Budget surplus= government spending

Question 21

Fiscal policy

Answer 21

The use of government taxes and spending to alter macroeconomic outcomes

Premise is that the aggregate demand for goods and services will not always be compatible with economic stability