Macroeconomics Chapter 13 (Unit 3)

False

False

False

Increase ……. Demand

an increase in the price level

relying on the automatic stabilizers

False

False

False

False

False

False

False

Increase……. $130

Fiscal policy refers to congress changing the levels of government spending and taxes to stabilize the economy (ex: achieve potential real GDP, the natural rate of unemployment, and price stability.)

to close a recessionary gap (recession) by increasing aggregate demand

to close an inflationary gap (boom) by decreasing aggregate demand

A schedule or curve that shows the total quantity of goods and services that would be demanded (purchased) at various price levels

discretionary …. non discretionary

the power or right to decide or act according to one’s own judgment; freedom of judgment or choice. (synonym: judgement)

active fiscal policy

It means that congress actually meets to implement changes in government expenditures and/or taxes to close an output gap

passive or automatic fiscal policy

discretionary fiscal policy

1.) High unemployment ( cyclical= repeated)
2.) Actual GDP < potential real GDP 3.) Unemployment rate > natural rate

-Increase aggregate demand
-Speed up the economy to reduce high employment

1.) Increase government spending
2.) Increase investment tax credit
3.) Reduce corporate income tax rate
4.) Reduce personal income taxes
5.) Increase transfer payments
6.) Incur(get/acquire) a budget deficit

A rise in the general level of prices in an economy, an increase in an economy’s price level

The amount by which expenditures(the action of spending funds ; an amount of money spent) exceed revenues(income/earnings: usually state or company or organization) in any year

The amount by which the revenues (income/earnings: usually state or company or organization) of the federal government exceed its expenditures(the action of spending funds; an amount of money spent) in any year. EXAMPLE/ EASIER DEFINITION:
when a government spends more on programs than it collects.

– triangleGDP= m x triangle (spending)

increase

1.) Multiplier effect: Initial increase in C, Ig, and/or G causes larger increase in real GDP
2.) Aggregate demand increases

1.) Unemployment falls
2.) Negative GDP gap closed
3.) Actual GDP= potential real GDP
4.) Unemployment rate= natural rate

1.) Demand-pull inflation
2.) Actual GDP> potential real GDP
3.) Unemployment rate < natural rate

– Decrease aggregate demand
– Slow down the economy to reduce demand-pull inflationary pressures

Increases in the price level (inflation) resulting from increases in aggregate demand ; “too much spending chasing too few goods”

1.) Reduce government spending
2.) Reduce investment tax credit
3.) Increase corporate income tax rate
4.) Increase personal income taxes
5.) Decrease transfer payments
6.) Incur a budget surplus

1.) Multiplier effect: Initial decrease in C, Ig, and/or G causes larger decrease in real GDP
2.) Aggregate demand decreases

1.) Demand-pull inflationary pressures fall
2.) Positive GDP gap closed
3.) Actual GDP= potential real GDP
4.) Unemployment rate= natural rate

decreases ….. decreases

decreases

decrease

MPC x triangle Disposable income = triangle C

decreases

triangle real GDP = multiplier x triangle C

increases ….. increases

increases

increase

MPC x triangle disposable income = triangle C

increases

triangle real GDP = multiplier x triangle C

consumer spending

Government spending

increase

decrease

triangle real GDP = multiplier x triangle G

manipulates

automatically

1.) Increases the government’s budget deficit (or reduces its budget surplus) during a recession both of which are expansionary
2.) Increases the government’s budget surplus (or reduces its budget deficit) during an expansion both of which are contractionary

1.) Personal income tax, corporate income tax, sales tax, payroll tax revenues
2.) Unemployment compensation
3.) Welfare payments

deficit ( speed up economy )

surplus

1.) The automatic stabilizers are “built-in” to federal government programs, therefore the dollar amounts change with no explicit action taken by congress
2.) The automatic stabilizers do not suffer from some of the timing problems of discretionary fiscal policy. No recognition lag and no administrative lag.
3.) The automatic stabilizers lessen the possibility of another Great Depression

stable

1.) The greater the economy’s built-in stability
A. Net tax line is steeper because of higher marginal tax brackets
B. Larger cyclical deficits and surpluses
2.) The greater the economy’s stability with respect to changes in the MPC
A. After-tax consumption function is flatter because of higher marginal taxes
B. MPC becomes smaller, thus the multiplier becomes smaller

income after taxes and transfers

Marginal Propensity to Consume.
– The fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income.

change in real GDP/ Initial change in spending

less

Adjusts the actual federal budget deficit ( or surplus) for non-discretionary outcomes

recession

government’s overall policy, expansionary, contractionary, or neutral

expansionary

contractionary

A.) Problems of timing
B.) Problem of the political business cycle
C.) Future policy reversals
D.) Problems with state and local government fiscal policies offsetting federal fiscal policy
E.) Problem of the crowding-out effect
F.) Problems with implementing fiscal policy in an open economy (foreign sector)

Amount by which government expenditures exceed tax collections in a given year

taxes

Amount by which tax collections exceed government expenditures in a given year

Accumulation of federal budget deficits and surpluses over time

-Treasury bills
-Treasury notes
-Treasury bonds
-U.S. savings bonds

having the department of the Treasury issue new U.S. Treasury securities

increase

decrease

no change

1.) Wars
2.) Recessions
3.) Lack of fiscal discipline by congress ( spend, spend, spend brings in the congressional votes. Also, tax cuts (popular with the voters) without offsetting cuts in government spending

no

1.) Refinancing maturing Treasury securities
2.) Increasing taxes
3.) Creating money (through the federal reserve in a national emergency)

1.) The public debt is a liability to Americans as taxpayers and an asset(strength) to the owners of the government securities
2.) If the entire public debt is held internally by Americans , the liability would exactly offset the asset, or we would “owe it to ourselves”
3.) If the public debt is owned by foreigners, then the externally-held debt may have a negative impact on the U.S. economy

Yes, if assuming that:
1.) Ownership of the public debt is concentrated among wealthier groups
2.) If most people pay income taxes and since the overall federal tax system is slightly progressive, payment of interest on the public debt slightly increases income inequality

No, if assuming that :
1.) Ownership of the public debt is concentrated among wealthier groups
2.) Payment of income taxes is concentrated among wealthier groups

A rise in interest rates and a resulting decrease in planned investment caused by the federal government’s increased borrowing to finance budget deficits and refinance debt.

An expansionary fiscal policy designed to increase aggregate demand will increase the budget deficit. If the deficit is financed by an increase in government borrowing, interest rates will increase causing private-sector investment spending (Ig) to fall. The “crowding out” of investment reduces aggregate demand and,thus, weakens the impact of the expansionary fiscal policy

private-sector investment spending