chapter 13

Question 1

federal budget

Answer 1

annual statement of the federal government’s outlays and revenues

Question 2

two purposes of the federal budget

Answer 2

1. to finance the activities of the federal government
2. to achieve macroeconomic objectives

Question 3

fiscal policy

Answer 3

use of fed budget to achieve macro objectives, like full employment, sustained economic growth, & price level stability

Question 4

who makes fiscal policy?

Answer 4

the federal government and Parliament

Question 5

where does government revenue come from?

Answer 5

personal income taxes, corporate income taxes, indirect taxes, and investment income

Question 6

what are outlays?

Answer 6

transfer payments, expenditure on goods/services, & debt interest

Question 7

federal government’s budget balance =

Answer 7

revenues - outlays

Question 8

budget surplus

Answer 8

revenues exceed outlays

Question 9

budget deficit

Answer 9

outlays exceed revenues

Question 10

balanced budget

Answer 10

revenues = outlays

Question 11

government debt

Answer 11

total amount that the government is borrowing. it is the sum of past deficits minus past surpluses

Question 12

supply-side effects of fiscal policy

Answer 12

employment, potential GDP, & AS

Question 13

tax wedge

Answer 13

the gap created between the before-tax &after-tax wage rates

Question 14

taxes on consumption expenditure add to the tax wedge because:

Answer 14

• tax on consumption raises prices paid for consumption goods/services
• equivalent to a cut in real wage rate

Question 15

real after-tax interest rate equation

Answer 15

nominal interest rate x (1 - tax rate) - inflation
(all in % form)

Question 16

fiscal stimulus

Answer 16

use of fiscal policy to increase production & employment. can either be automatic or discretionary

Question 17

automatic fiscal policy

Answer 17

fiscal policy action triggered by state of economy w/ no government action

Question 18

discretionary fiscal policy

Answer 18

policy action initiated by an act of Parliament

Question 19

two items in the government budget that change automatically in response to the state of the economy

Answer 19

tax revenues and outlays

Question 20

in a recession, what happens to tax revenues and outlays?

Answer 20

tax revenues decrease and outlays increase

Question 21

in a boom, what happens to tax revenues and outlays?

Answer 21

tax revenues increase and outlays decrease

Question 22

structural surplus or deficit

Answer 22

budget balance that would occur if economy were at full employment & real GDP = potential GDP

Question 23

cyclical surplus or deficit

Answer 23

the actual surplus/deficit minus the structural surplus/deficit. it is the surplus/deficit that occurs purely because real GDP does not equal potential GDP

Question 24

two main fiscal multipliers

Answer 24

1. government expenditure multiplier
2. tax multiplier

Question 25

government expenditure multiplier

Answer 25

the quantity effect of a change in government expenditure on real GDP

Question 26

tax multiplier

Answer 26

the quantity effect of a change in taxes on AD

Question 27

recognition lag

Answer 27

time it takes to figure out fiscal policy action is needed

Question 28

law-making lag

Answer 28

the time it takes parliament to pass the laws needed to change taxes or spending

Question 29

impact lag

Answer 29

the time it takes from passing a tax or spending change to its effect on real GDP being felt