Test 3: ch 9 (fiscal policy)

Question 1

Automatic/built-in stabilizers

Answer 1

Are automatic changes in the government’s budget are often referred to as built-in, or automatic, stabilizers because they change automatically as economic conditions change and they counteract the business cycle.

Question 2

Fiscal policy

Answer 2

Fiscal policy is the government’s powers of spending and taxation. Fiscal policy is used to change the government’s budget to pursue the three main goals of macroeconomics.

Question 3

Three main macroeconomic goals for most economies

Answer 3

full employment, price stability, and economic growth.

Question 4

Change in government’s budget

Answer 4

which is comprised of two parts: government expenditures (G) and net taxes (T).

Question 5

Net taxes

Answer 5

Net taxes are equal to total tax revenue minus transfer payments made by the government.

Question 6

Budget deficit

Answer 6

exists when the government expenditures exceed net taxes (G>T).

Question 7

Budget surplus

Answer 7

exists when net taxes exceed government expenditures (G

Question 8

Balanced budget

Answer 8

A balanced budget exists when government expenditures equal net taxes (G=T).

Question 9

changes in AD via government spending

Answer 9

A reduction in government spending decreases aggregate demand.
An increase in government spending results in an increase of aggregate demand.
(G and AD have a direct relationship.)

Question 10

changes in AD via tax changes

Answer 10

An increase in taxes causes a decrease in aggregate demand.
A decrease in taxes results in an increase in aggregate demand.
(T and AD have an inverse relationship)

Question 11

Autonomous expenditures (spending) multiplier

Answer 11

The multiplier effect suggests that any change in aggregate autonomous expenditure will change income and real GDP by some multiple of the initial change in spending. The formula can be used to perform fiscal policy analysis when a change in government spending is being considered as well as predict the impact of a change in taxes on the economy’s equilibrium level of income and output.
Formula: 1/(1-MPC)= 1/MPS = chg Y/ chg I = chg Y/ chg G

Question 12

Tax multiplier

Answer 12

Tax multiplier can be used to calculate changes in real GDP (y) that results from tax changes.
Formula: -MPC/MPS or = 1-autonomous spending multiplier

Question 13

Balanced budget multiplier

Answer 13

In this three-sector Keynesian model, the balanced budget multiplier is always equal to one, regardless of the values of the MPC and MPS.

Question 14

Discretionary fiscal policy

Answer 14

Changes in government spending and taxation designed to achieve specific macroeconomic goals.

Question 15

Adding government (C+I+G): Equilibrium

Answer 15

Assumptions:

1) investment spending and government spending are autonomous: independent of the level of current income.
2) SRAS curve is horizontal: Taxes are lump-sum taxes - paid one time.

Question 16

Supply-side fiscal policy

Answer 16

implies that the policies are designed to stimulate output or aggregate supply.

Question 17

Changes in marginal tax rates

Answer 17

is the rate applied to additional personal and business income.

Question 18

Laffer curve

Answer 18

The curve shows that tax revenue increases as the tax rate increases, it hits a maximum, T, and then begins to decrease beyond some relatively high rate, such as t.

Question 19

Federal government sources and uses of revenue

Answer 19

IDK

Question 20

Cyclical deficit

Answer 20

Even if Congress passes a balanced budget, downturns in economic activity (business cycle/recession) can trigger automatic increases in government spending and a decrease in tax revenue, resulting in a cyclical deficit.

Question 21

Structural deficit

Answer 21

If Congress approves a budget for which spending is grater than projected tax revenue, then there is already a structural deficit.
- A deficit that exists even at full employment. meaning you are spending more than you can get in (taxes). “cant grows big enough to pay the deficit off”.

Question 22

National (public) debt

Answer 22

• The liabilities of the United States Government. It’s the total stock of outstanding government securities (bonds)
• Its originates in the budget deficit
• US government bonds are held by US citizens, private institutions and government agencies.