14. Fiscal Policy

Question 1

Capital expenditure

Answer 1

Expenditure on physical capital (fixed assets).

Question 2

Current government spending

Answer 2

With respect to government expenditures, spending on goods and services that are provided on a regular, recurring basis including health, education, and defense.

Question 3

Fiscal multiplier

Answer 3

The ratio of a change in national income to a change in government spending.

Question 4

Household

Answer 4

A person or a group of people living in the same residence, taken as a basic unit in economic analysis.

Question 5

Keynesians

Answer 5

Economists who believe that fiscal policy can have powerful effects on aggregate demand, output, and employment when there is substantial spare capacity in an economy.

Question 6

Marginal propensity to consume

Answer 6

The proportion of an additional unit of disposable income that is consumed or spent; the change in consumption for a small change in income.

Question 7

Marginal propensity to save

Answer 7

The proportion of an additional unit of disposable income that is saved (not spent).

Question 8

Monetarists

Answer 8

Economists who believe that the rate of growth of the money supply is the primary determinant of the rate of inflation.

Question 9

Net tax rate

Answer 9

The tax rate net of transfer payments.

Question 10

Ricardian equivalence

Answer 10

An economic theory that implies that it makes no difference whether a government finances a deficit by increasing taxes or issuing debt.

Question 11

Structural budget deficit

Answer 11

Also known as the cyclically adjusted budget deficit. The deficit that would exist if the economy was at full employment (or full potential output).

Question 12

Transfer payments

Answer 12

Welfare payments made through the social security system that exist to provide a basic minimum level of income for low-income households.