Fiscal stimulus that increases an existing government budget deficit ______ loanable funds and ______ investment.A. decreases the demand for; increasesB. decreases the supply of; decreasesC. increases the demand for; decreasesD. increases the demand for; increases
C. increases the demand for; decreases
Fiscal policy attempts to achieve all of the following objectives except ______.A. a stable money supplyB. price level stabilityC. full employmentD. sustained economic growth
A. a stable money supply
An economy is experiencing a recessionary gap. The government can ______.A. increase expenditure or cut taxes to increase aggregate demandB. raise taxes or decrease the quantity of money to decrease long-run aggregate supplyC. raise taxes to decrease long-run aggregate supplyD. increase expenditure or cut taxes to increase short-run aggregate supply
A. increase expenditure or cut taxes to increase aggregate demand
A country has been in existence for only two years. In the first year, receipts were $1.0 million and outlays were $1.5 million. In the second year, receipts were $1.5 million and outlays were $2.0 million. At the end of the second year, the government had issued debt worth ______.A. $1 millionB. $0.5 millionC. minus−$0.5 millionD. minus−$1 million
A. $1 million
Fiscal policy is more effective if the MPC is ______, which is more likely if tax cuts are targeted for _____ income households.A. lower, higherB. lower, lowerC. higher, higherD. higher, lower
D. higher, lower
A tax on labor income ______. The equilibrium quantity of labor ______. A. decreases the supply of labor and increases the demand for labor; increasesB. decreases the supply of labor and increases the demand for labor; decreasesC. decreases the supply of labor; decreasesD. decreases the demand for labor; decreases
C. decreases the supply of labor; decreases
At the new equilibrium quantity of labor, the before-tax wage rate ▼ falls/rises and the after-tax wage rate ▼ rises/falls
risesfalls
The relationship between the _____ is called the Laffer Curve.A. interest rate and the inflation rateB. tax rate and the amount of tax revenue collectedC. tax rate and economic growth rateD. the amount of tax revenue collected and the exchange rate
B. tax rate and the amount of tax revenue collectedIf tax rate is too high, people work less, less to tax => Revenues decrease.TAX REV = TAX RATE x TAX BASE
Explain the difference between the national debt vs. federal budget deficit
Deficit is annual (flow)Debt is accumulated total (stock)
Discretionary fiscal policy
- when federal government specifically acts to influence economy through use of fiscal policy such as spending changes or tax changes *Recessionary gap*Full employment*Expansionary or inflationary gap
Discretionary Fiscal Policy:effects on AD of a change in G
Changing government spending (usually Federal government)C + I + G + X - M => ADIncrease G, AD increasesDecrease G, AD decreases1 / (1-MPC)AD shifts by amount equal to: (change in G) x (expenditure multiplier)
Discretionary Fiscal Policy:effects on AD of a change in T
C(taxes) + I(taxes) + G + X - MDecrease in taxes, C or I increase, depending on type of taxAD increases with decrease in taxes - MPC / (1-MPC)AD shifts by amount equal to: (change in T) x (tax multiplier)
When is MPC likely to be larger?
Fiscal policy is more effective if the MPC is higher, which is more likely if tax cuts are targeted for lower income households.
Fiscal policy is more effective
When is the multiplier high (When are people likely to spend)?When there is no crowding out-Recession -International borrowing-Interest rates low
When should G or T be increased or decreased?
Decrease GIncrease Tto correct deficit
Know what is meant by automatic vs. discretionary fiscal policy
Automatic stabilizers= changes in tax revenues or government spending that occur without overt action by Congress or policymakers-Progressive income tax-Means-tested programs; unemployment insurance*Discretionary and automatic fiscal policy can help smooth business cycles...
Supply side issues: Tax wedges
Taxes change incentives:-Income tax (work less)-Tax on corporate profits (invest less)-Tax on dividends (save less)-Tax on capital gains (save less)
Potential harms of national debt and the issues with trying to reduce the debt
Higher interest Less national saving available for investmentLess ability to deal with unexpected issues-Wars-DownturnsHigher probability of crisisHarms of correcting:UnemploymentLoss of human capitalPoverty => familiesLong Run Harm (debt) vs. Short Run Harm (recessionary gap)
Regressive Taxes
As income increases, percentage of income paid as tax decreasesMarginal Tax Rate decreasesSocial Security tax, sales tax
Progressive Taxes (relative to income)
As income increases, percentage of income paid as tax increases Marginal Tax Rate increasesExample: Federal Income tax
Flat or proportional tax
As income increases, percentage of income paid as tax is sameConstant marginal tax rate