Module 10

Question 1

Fiscal Policy

Answer 1

changes in federal purchase and taxes to achieve macroeconomic goals.

Question 2

Government Expenditures

Answer 2

(LARGEST) transfers, interest on debt, grants, and purchases.

Question 3

Government purchases

Answer 3

Must involve the delivery of goods or services in return.

Question 4

Government Revenue

Answer 4

personal taxes, social insurance tax, corporate tax, and other.

Question 5

Automatic Stabilizer

Answer 5

Spending and taxes that automatically change business cycles.

Question 6

Discretionary Fiscal Policy

Answer 6

The government takes action to change spending or taxes.
US CONGRESS: NEW LEGISLATION
POTUS: EXECUTIVE ORDERS

Question 7

Expansionary Fiscal Policy

Answer 7

In a recession, the actual level of GDP without policy is below potential GDP -> increasing government purchases or decreasing taxes -> the AD curve shifts right -> an increase in real GDP fills the recessionary gap.

Question 8

Contractionary Fiscal Policy

Answer 8

In an expansion, the level of real GDP without policy is above potential GDP -> decreasing government purchases or increasing taxes -> the AD curve shifts left ->a decrease in the price level to reduce the inflationary gap.

Question 9

Autonomous Expenditure

Answer 9

ceteris paribus, an initial $100 billion increase in government purchases -> the AD curve shifts to the right exactly by $100 billion.

Question 10

Multiplier Effect

Answer 10

The series of induced increases in consumption spending -> the AD curve shifts further to the right -> and additional increase in real GDP.
Thanks to the multiplier effect, a $100 billion increase in government purchases shifts the AD curve to the right more than $100 billion, as consumption increases.

Question 11

Solving for macroeconomic equilibrium

Answer 11

1) Calculate the Aggregate Expenditure Function: AE= C +I + G + NX
2) Set the macroeconomic equilibrium condition: Y =AE
3) Solve for Y*

Question 12

Government purchases multiplier

Answer 12

1/(1-MPC) -> change in Y = change in G * 1/(1-MPC)

Question 13

Tax multiplier

Answer 13

-MPC/(1-MPC) -> change in Y = change in T * -MPC/ (1-MPC)

Question 14

Balanced Budget Multiplier

Answer 14

1 -> change in Y = change in G *1

Question 15

An increase in government purchases…

Answer 15

increases the federal deficit and debt

Question 16

Federal budget deficit

Answer 16

government expenditures > tax revenue (a flow)

Question 17

Federal government debt

Answer 17

Total value of outstanding Treasury securities (a stock).

Question 18

Each year…

Answer 18

The federal budget is in a deficit; the federal debt grows.

Question 19

Crowding out

Answer 19

An increase in government purchases decreases private expenditures.

Question 20

Crowding out (graph)

Answer 20

An increase in government purchases shifts the AD to the right -> the federal budget deficit shifts the money demand to the right -> the interest rate increases -> a decline in private spending (C an I) -> the AD curve shifts left - the size of the multiplier decreases.

Question 21

Supply side economists

Answer 21

They argue that there is a behavioral response to tax reforms: a tax simplification can incentivize households to work more and firms to invest more.

Question 22

Supply side economics (long-run)

Answer 22

In the long-run, a tax reform could increase the labor supply and the capital stock -> the LRAS curve shifts right -> an increase in real GDP while reducing the price level.