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ECON 202
Macroeconomics Final Exam: Chapter 13 Fiscal Policy
| Question | Answer |
|---|---|
| Self-correction | Prices Adjust over time to close an output gap |
| Government Intervention | unreliable economy self-correction |
| What is the effect on the SRAS curve during self-correction? | shifts to restore long-run equilibrium |
| Federal Budget | yearly plan for spending and revenue of US federal gov. |
| What is the fiscal year? | 12 month period between oct. 1 of previous year and Sept. 30 of current year |
| What is the largest source of federal revenue? | personal income tax |
| What is income tax revenue used for? | general spending purposes |
| What is Social Insurance tax revenue used for? | earmarked for social security and medicare |
| Who authorizes mandatory spending? | Law |
| What are examples of mandatory spending? | Social Security, Medicare, Income Support |
| Who authorizes discretionary spending? | subject to approval by congress |
| What are examples of discretionary spending? | Defense, Education, Health |
| When is expansionary fiscal used? | To stimulate economy |
| How is AD effected in expansionary fiscal policy? | Increase AD |
| What type of fiscal policy will likely have the largest impact on the economy? | Increase gov. purchases |
| What type of fiscal policy will indirectly support overall demand? | Increase transfer payments, cut taxes |
| When will contractionary fiscal policy be used? | to slow down the when the economy is in an unsustainable boom |
| How will contractionary fiscal policy effect AD? | Decrease AD |
| What will directly effect economy during contractionary fiscal policy? | decrease gov. purchases |
| What will indirectly effect economy during contractionary fiscal policy? | Decrease transfer of payment, raise taxes |
| recognition lag | it takes time to realize policy action is needed |
| implementation lag | it takes time to approve policy actions |
| impact lag | it takes time for policy effect to materialize |
| Discretionary fiscal policy | at the discretion of lawmakers, required deliberate action by lawmakers |
| What are the downsides of Discretionary fiscal policy? | subject to time lags, may not be enacted in time |
| Examples of Discretionary fiscal policy | changes in tax rates, stimulus package |
| When is Automatic stabilizer used? | kicks in automatically when economic conditions change |
| Does automatic stabilizer require lawmaker actions? | no |
| What is the advantage of Automatic stabilizer? | avoids policy lags, reduce swings of business cycle, affect budget balance |
| Example of automatic stabilizer: unemployment and other income support programs | because spending is tied to economic conditions |
| How does unemployment change in a recession using automatic stabilizer | increases, more people are eligible for benefits, spending on benefits increases, buffer the decrease in income |
| Example of automatic stabilizer: Progressive Tax system | because revenue is tired to economic conditions |
| How does a progressive tax system change in a recession using automatic stabilizer | Unemployment increases, income decreases, owe less taxes automatically, buffer the decrease in income |
| equation for balanced budget | T=G |
| equation for budget deficit | T<G |
| equation for budget surplus | T>G |
| What does T and G stand for in the budget equation | T= Gov. revenue G= Gov. spending |
| What is the effect of Automatic Stabilizers on a balanced budget during a recession? | tax revenue lover but spending higher than planned. Push budget balance towards deficit |
| What is the effect of Discretionary Fiscal Policy on a balanced budget during a recession? | government might take additional expansionary actions. Push budget balance towards deficit |
| What is the effect of expansions on budget balance? | Automatic Stabilizer and deliberate contractionary policy push the budget balance towards a surplus |
| What is the main lesson of expansions on budget balance? | unrealistic/ undesirable to have a balanced budget every year. Save in good years, absorb deficit in bad years |
| Where was fiscal spending increased during the great depression? | public work programs |
| What legislation increased taxes during the Great Depression? | Revenue Act 1932 |
| What was the net effect of fiscal policy during the Great Depression? | Not much stimulus |
| When did the great recession begin? | Dec. 2007 |
| What was the Econ. Stimulus Act of 2008? | tax cuts in the form of $168 billion tax rebates |
| What was the American Recovery and Reinvest Act of 2009? | $787 billion spending hikes |
| Where was fiscal spending increased during the Great Recession? | transfer payments like unemployment benefits |
| What is the US national debt? | total debt owed by the US fed. gov., cumulative result of past budget deficits |
| What is the Deficit-GDP ratio? | deficit is a flow variable, attached to a given time period |
| What is the Debt-GDP ratio? | Debt is a stick variable, attached to a specific point in time |
| When would be a case that national debt would crowd out private investment? | When economy operates near full-employment |
| What is the risk of a high debt-GDP ratio? | raises risk of default and brings up borrowing costs |
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