Chapter 14: Fiscal Policy

Question 1

Fiscal policy

Answer 1

The use of taxes and government spending to affect the level of aggregate expenditures.

Question 2

Monetary policy

Answer 2

Actions taken by a nation’s central bank to affect aggregate output and prices through changes in bank reserves, reserve requirements, or its target interest rate.

Question 3

Structural budget deficit

Answer 3

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 4

Budget surplus/deficit

Answer 4

The difference between government revenue and expenditure for a stated fixed period of time.

Question 5

Expansionary

Answer 5

Tending to cause the real economy to grow.

Question 6

Keynesians

Answer 6

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 7

Monetarists

Answer 7

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

Question 8

Economic stabilization

Answer 8

Reduction of the magnitude of economic fluctuations.

Question 9

Expansionary fiscal policy

Answer 9

Fiscal policy aimed at achieving real economic growth.

Question 10

Contractionary fiscal policy

Answer 10

A fiscal policy that has the objective to make the real economy contract.

Question 11

Automatic stabilizer

Answer 11

A countercyclical factor that automatically comes into play as an economy slows and unemployment rises.

Question 12

Balanced

Answer 12

With respect to a government budget, one in which spending and revenues (taxes) are equal.

Question 13

Transfer payments

Answer 13

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

Question 14

Current government spending

Answer 14

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

Question 15

Capital expenditure

Answer 15

Expenditure on physical capital (fixed assets).

Question 16

Direct taxes

Answer 16

Taxes levied directly on income, wealth, and corporate profits.

Question 17

Indirect taxes

Answer 17

Taxes such as taxes on spending, as opposed to direct taxes.

Question 18

Net tax rate

Answer 18

The tax rate net of transfer payments.

Question 19

Fiscal multiplier

Answer 19

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

Question 20

Marginal propensity to consume

Answer 20

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 21

Marginal propensity to save

Answer 21

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

Question 22

Household

Answer 22

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

Question 23

Ricardian equivalence

Answer 23

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

Question 24

Recognition lag

Answer 24

The lag in government response to an economic problem resulting from the delay in confirming a change in the state of the economy.

Question 25

Action lag

Answer 25

Delay from policy decisions to implementation.

Question 26

Impact lag

Answer 26

The lag associated with the result of actions affecting the economy with delay.