Chapter 10 Flashcards Preview

Macroeconomics > Chapter 10 > Flashcards

Flashcards in Chapter 10 Deck (30):

Fiscal Policy

Use of government spending and/or taxes to alter RGDP and the price level


What is a Budget Deficit?

When government spending exceeds tax revenues for a given fiscal year


What is a Budget Surplus?

When tax revenues are greater than government expenditures for a given fiscal year


What is an Expansionary Fiscal Policy?

Use of fiscal policy tools to foster increased output by increasing government spending and/or lowering taxes


What is a Contractionary Fiscal Policy?

Use of fiscal policy tools to reduce output by decreasing government spending and/or increasing taxes


Progressive tax

The amount of an individual's tax rises as a proportion of income, as the person's income rises


Excise tax

A sales tax on individual products such as alcohol, tobacco, and gasoline


Regressive tax

The amount of an individual's tax falls as a proportion of income, as the person's income rises


Proportional tax

Designed so that all tax payers are subject to the tax rate, regardless of earnings


What is the Multiplier effect?

A chain reaction of additional income and purchases that results in total purchases that are greater than initial increase in purchases


What is the Multiplier equation?

Multiplier= 1 / 1-MPC


What is the Tax Multiplier equation?

MPC / 1 - MPC


How can Fiscal policy alleviate a recessionary gap?

The primary tools of fiscal policy, government spending and taxes, can be presented in the context of aggregate supply and demand model to show how the government can use the fiscal policy as an expansionary tool to help control the economy


What impact does the multiplier effect have on the aggregate demand curve?

An increase in government purchase will shift the aggregate demand curve to the right to match the initial purchase but will quadruple over time shifting to the right even more


Tax multiplier equation

Tax multiplier = MPC / 1 - MPC


Automatic stabilizers

Changes in government spending or tax collection that automatically help counter business cycle fluctuations


Crowding- out effect

Theory that government borrowing drives up the interest rate, lowering consumption by households and investment spending by firms


How does fiscal policy affect the government's budget?

Expansionary fiscal policies will increase the budget deficit (or reduce a budget surplus) through a greater government spending , lower taxes or both. Contractionary fiscal policies will increase a budget surplus (or reduce a budget deficit) through reduced government spending, higher taxes or both.


What are the major categories of government spending?

25% is in the form of major transfers to persons, such as employment insurance and old age security programs. Other major expenditures (21%) are transfers to other levels of government and 18% expenditures associated with the operation of other departments and agencies.


What are the major sources of government revenue?

The largest source of federal revenue is income taxes on individuals and corporations (49% and 13%) other taxes and duties collected by the federal government account for 10% of revenues


What impact does the multiplier effect have on tax cuts?

Because taxes have only and indirect impact on aggregate demand, the tax multiplier is smaller than the government spending multipier


What factors can potentially reduce the size of the multiplier?

Because of a time lag, the full impact of the multiplier effect on GDP may not be felt until a year or more after the initial purchase. Also, the ultimate size of the multiplier may be reduced by increases in savings rates, taxes, and money spent on imported goods.


How can fiscal policy alleviate an inflationary gap?

A government decision to spend more money and or cut taxes would increase total purchases and shift out the aggregate demand curves. If the correct magnitude of expansionary fiscal policy is used in a recession, it could potentially bring the economy to full employment at a higher price level.


How does the tax system stabilize the economy?

The tax system is the most important automatic stabilizer; it has the greatest ability to smooth out swings in GDP during business cycles. Other automatic stabilizers are employment insurance and social assistance payments.


How is the budget deficit financed?

Issuing debt


What has happened to the federal budget balance?

Improvement in the federal budget balance since the mid 1990's resulted from economic growth, increased tax revenues, and the efforts of the federal government to control the growth of federal spending


What is the impact of reducing a budget deficit?

In the short run, reducing a budget deficit can lead to a recession ( if not offset by expansionary monetary policy). In the long run, however, deficit reduction increases economic growth and lowers the price level.


How much is the burden in government debt in Canada?

With greater fiscal responsibility and increased economic growth, Canada has managed to lower its debt - GDP ratio (the international debt burden)


How do the lags in policy implementation affect policy effectiveness?

The time lag in between when a fiscal policy may be needed and when it eventually affects the economy is considerable. Time lags are usually grouped into three classifications:
-Recognition lags
-Implementation lags
-Impact lags


How does the crowding out effect limit the economic impact of expansionary fiscal policy?

If crowding-out causes a higher Canadian interest rate, it will attract foreign funds. In order to invest in Canadian economy, foreigners first have to convert their money into Canadian dollars. The increase in demand for dollars relative to other currencies will cause the dollar to appreciate in value, making exports relatively cheaper. this will cause net exports to fall. (X-M)