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Econ 202 Macroeconomics > Chapter 17: Fiscal Policy > Flashcards

Chapter 17: Fiscal Policy Flashcards

1
Q

Budget Deficit

A

Government spends more money than it receives in taxes

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2
Q

Budget Surplus

A

Government receives more money in taxes than it spends in a year

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3
Q

Balanced Budget

A

Government spending and tax revenue are equal

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4
Q

How has federal government spending trended since 1960?

A

It has stayed between 18-22% of GDP

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5
Q

What are 4 of the largest categories of federal government spending?

A
  1. Social Security
  2. National Defense
  3. Net interest
  4. Healthcare
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6
Q

What is the difference between the federal deficit and the debt?

A

Deficit reflects the annual budget

Debt is the sum of all past deficits and surpluses; total amount owed.

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7
Q

What percentage of federal government spending do Social Security, National Defense, net interest, and healthcare, total?

A

about 73%

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8
Q

What is the biggest state & local government expense, and about what percentage of spending is it?

A

Education

Usually about 33% of the state & local government budgets

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9
Q

What are balanced budget laws? Which states have them?

A

Laws that require any gaps between state revenues and spending must be closed by higher taxes or decreased spending. All states except Vermont have these laws.

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10
Q

Through which government does most of crime and education spending occur?

A

State and local governments

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11
Q

Has federal government spending grown substantially over the decades?

A

No, it has stayed about the same proportion/percentage of GDP

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12
Q

What is the largest source of federal government revenue?

A

Individual income tax

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13
Q

What is the second largest source of federal government revenue?

A

Payroll Tax

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14
Q

Progressive Tax

A

Tax rates increase as a household’s income increases

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15
Q

What is the argument that employees pay both sides of the payroll tax?

A

Economists argue that the employer’s half of the taxes are realistically passed along to employees in the form of lower wages, so in reality the worker pays all the payroll taxes

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16
Q

Proportional Tax

A

Flat percentage tax on all wages earned

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17
Q

Regressive Tax

A

People with higher incomes pay a smaller share of their income in tax

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18
Q

What type of tax is income tax?

A

Progressive Tax (in theory)

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19
Q

What type of tax is Medicare?

A

A Proportional Tax (flat-rate)

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20
Q

What type of tax is Social Security?

A

Proportional Tax up to the wage limit, and then a Regressive Tax

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21
Q

What is the third largest source of federal government revenue?

A

Corporate Income Tax (1-4%)

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22
Q

Excise Tax

A

Tax on a particular good such as gas, tobacco, alcohol

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23
Q

What are the main revenue sources for state and local governments?

A

Sales tax
Property tax
Revenue from federal government

24
Q

What is the federal government’s fiscal year end?

A

Ends September 30th

25
Q

What is the national debt?

A

The dollar value of all outstanding Treasury bonds on which the federal government owes money

26
Q

When did budget surpluses recently occur?

A

1998-2001

27
Q

When was the budget deficit the higher during the past century?

A

World War II

28
Q

When governments run budget deficits, how do they make up the differences between tax revenue and spending?

A

The government borrows funds by selling Treasury bonds, notes, and bills.

29
Q

When governments run budget surpluses, what is done with the extra funds?

A

The funds can be used to pay down the national debt or else be refunded to the taxpayers.

30
Q

Is it possible for a nation to run budget deficits and still have its debt/GDP ratio fall?

A

Yes. If the deficit is small in a given year, than the addition to debt in the numerator of the debt/GDP ratio will be relatively small, while the growth in GDP is larger, and so the debt/GDP ratio declines.

31
Q

Why might aggregate demand shift left?

A

Households become hesitant about consuming, firms decide against investing, demand from other countries for exports diminish

32
Q

What type of actions does the central bank use?

A

Countercyclical, “against the business cycle”

33
Q

How does expansionary fiscal policy affect aggregate demand?

A

Increases aggregate demand, through either increases in government spending or reductions in taxes

34
Q

How much did US government spending increase from 2007 to 2009?

A

About 5% of GDP, from 19.6% to 24.6%

35
Q

Which political party tends to favor tax cuts in expansionary policy?

A

Conservatives

36
Q

Which political party tends to favor spending increases in expansionary policy?

A

Liberals

37
Q

Overheating Economy

A

Economy in which demand is so high there is upward pressure on wages and prices, causing inflation. Offset with contractionary fiscal policy.

38
Q

Contractionary Fiscal Policy

A

Federal spending cuts or tax increases, to reduce upward pressure on prices and inflation

39
Q

Automatic Stabilizers

A

Fiscal policy designed to offset fluctuations in economic activity through normal operation without additional government authorization needed. Examples are progressive taxes, and transfer systems such as insurance and welfare.

40
Q

Why is a reason the economy has tipped into recessions less frequently in recent decades?

A

Government spending and taxes have increased from 2% in 1900 to closer to 20% now. This increases the power of automatic stabilizers.

41
Q

Do automatic stabilizers occur quickly or slowly?

A

Quickly. Lower wages affects tax withholding right away. Higher unemployment or poverty means government spending rises immediately as people apply for benefits.

42
Q

How does an increase in budget deficits affect interest rates?

A

Increases interest rates

43
Q

Crowding Out

A

Government borrowing and spending in expansionary fiscal policy, meant to increase demand, increases interest rates which reduces business investment and household consumption. Results in fiscal policy being less powerful than expected.

44
Q

What should be done to avoid “crowding out” in expansionary fiscal policy?

A

Coordinate fiscal policy with monetary policy, so the central bank can keep interest rates low

45
Q

Which has a longer time lag to be enacted - fiscal or monetary policy?

A

Fiscal policy

Takes time for policymakers to propose and pass fiscal policy bills

46
Q

Under what scenario is fiscal policy not helpful?

A

When an economy is already producing at an output level at or above potential GDP. Causes inflation due to scarce workers and rapidly rising wages.

47
Q

What is the main reason for employing contractionary fiscal policy in a time of strong economic growth?

A

To keep prices from rising too much or too rapidly.

48
Q

What is the main reason for employing expansionary fiscal policy during a recession?

A

To increase employment.

49
Q

In a recession, does the actual budget surplus or deficit fall above or below the standardized employment budget?

A

It falls below because less tax revenue than expected is collected.

50
Q

What is the main advantage of automatic stabilizers over discretionary fiscal policy?

A

Automatic stabilizers take effect very quickly, whereas discretionary policy can take a long time to implement.

51
Q

What would happen if expansionary fiscal policy was implemented in a recession but, due to lag, did not actually take effect until after the economy was back to potential GDP?

A

Prices would be pushed up as a result of too much spending.

52
Q

What would happen if contractionary fiscal policy were implemented during an economic boom but, due to lag, it did not take effect until the economy slipped into recession?

A

Employment would suffer as a result of too little spending.

53
Q

How would a balanced budget amendment change the effect of automatic stabilizer programs?

A

Programs where the amount of spending is not fixed, but rather determined by macroeconomic conditions, such as food stamps, would lose a great deal of flexibility if spending increases had to be met by corresponding tax increases or spending cuts.

54
Q

How would a balanced budget amendment affect a decision by Congress to grant a tax cut during a recession?

A

The government would have to make up the revenue either by raising taxes in a different area or cutting spending.

55
Q

What are some steps the government can take to encourage research and development?

A

The government can direct government spending to R&D. It can also create tax incentives for business to invest in R&D.

Econ 202 Macroeconomics (15 decks)

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