Lectures 17 and 18 Flashcards
What is fiscal policy?
changes to taxes and government spending to pursue a macroeconomic objective
Who conducts fiscal policy?In
the government- POTUS and Congress
What can be changed by fiscal policy?
Taxes and government spending
What two things make up the federal budget?
Receipts and outlays
What makes up receipts?
Personal Income Tax
Social Security + payroll taxes
Corporate Income Tax
Indirect taxes and other receipts (excise taxes, passport tax, gasoline tax)
What makes up outlays?
Transfer Payments
Expenditure on goods and services
Interest payments on federal debt
What are some examples of transfer payments?
Social security BENEFITS
TANF
EBT
What is a budget deficit?
When government outlays (spending) is greater than receipts (revenue)
How does the government finance a deficit?
By selling bills, notes, and bonds
What are the two types of fiscal policy?
Automatic
Discretionary
What can the government due to facilitate an expansionary fiscal policy?
Increase government spending
Reduce taxes
When is an expansionary fiscal policy put in place?
During a recessionary gap
What does an expansionary gap lead to?
increase in real GDP and employment
What can the government due to facilitate a contractionary fiscal policy?
Reduce government spending
Increase taxes
When is a contractionary policy put in place?
During an inflationary/expansionary gap
What does a contractionary gap lead to?
A reduction in real GDP and employment
Why would economists want to fix an inflationary gap?
Reduce inflation
minimize a future recession (business cycle)
control the budget deficit
How do automatic fiscal policies operate?
In the opposite way as the causation
When the economy is experiencing a recessionary gap, automatic fiscal policy is….
EXPANSIONARY
What happens during an expansionary automatic fiscal policy?
Tax receipts fall
Needs-tested spending increases
What happens during a contractionary automatic fiscal policy?
Tax receipts increase due to higher incomes
Needs-tested spending decreases
What kind of policy is reducing the income tax?
Expansionary
What are two ways workers can get more income?
Decrease in income tax
Increase in pay
What happens if the government reduces the income tax?
Employment rises
Real GDP rises
What kind of policy is reducing the capital gains tax?
Expansionary
What are two tax reductions as discretionary fiscal policy that cause an expansionary gap?
Reducing the income tax and the capital gains
What happens to the real interest rate when you reduce the capital gains tax?
The real interest rate falls
What happens to the equilibrium quantity of funds when you reduce the capital gains tax?
The equilibrium quantity of funds increases
What line moves when you reduce the capital gains tax?
The supply line shifts to the right
What line moves when you reduce the income tax?
The supply line shifts to the right
Is the government spending multiplier positive or negative?
Positive
Why is the government spending multiplier positive?
Increases in spending leads to increases in real GDP
Is the tax multiplier positive or negative?
Negative
Why is the tax multiplier negative?
Increases in tax receipts lead to a reduction in real GDP
Which multiplier has a larger effect?
The government spending multiplier
How do you obtain the balanced budget multiplier?
By getting the sum of the two multipliers (government spending and tax)
