Fiscal Policy

Question 1

What is “Fiscal Policy”?

Answer 1

The use of taxes and government spending to affect the level of aggregate expenditures (i.e., economic demand).

Question 2

What is “Monetary Policy”?

Answer 2

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

Question 3

What is a “Structural Budget Deficit”?

Answer 3

Also known as “cyclically-adjusted budget deficit”.

Definition: The deficit that would exist if the economy was at full employment (or full output potential).

Question 4

What is a Budget Surplus/Deficit?

Answer 4

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

Question 5

What is “Expansionary” policy?

Answer 5

Policy that tends to cause the real economy to grow.

Question 6

What are “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 the economy.

Question 7

What are “Monetarists”?

Answer 7

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

Question 8

What is “Economic Stabilization”?

Answer 8

A reduction of the magnitude of economic fluctuations.

Question 9

What is “Expansionary Fiscal Policy”?

Answer 9

Fiscal policy aimed at achieving real economic growth.

Question 10

What is “Contractionary Fiscal Policy”?

Answer 10

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

Question 11

What is an “Automatic Stabilizer”?

Answer 11

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

Question 12

What is a “balanced” budget?

Answer 12

when revenues (taxes) = spending (expenditures)

Question 13

What are “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

What is “Current” government spending?

Answer 14

(With respect to government expenditures) Spending on goods and services that are provided on a regular, recurring basis, such as health, education, and defense.

Question 15

What is Capital Expenditure?

Answer 15

Expenditure on Physical Capital (Fixed Assets).

Question 16

What are “Direct Taxes”?

Answer 16

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

Question 17

What are “Indirect Taxes”?

Answer 17

Taxes such as sales tax.

Question 18

What is the “Net Tax Rate”?

Answer 18

The tax rate on net transfer payments.

Question 19

What is a “Fiscal Multiplier”?

Answer 19

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

Question 20

What is the “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

What is the “Marginal Propensity to Save”?

Answer 21

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

Question 22

What is a “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

What is “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

What is a “Recognition Lag”?

Answer 24

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

Question 25

What is “Action Lag”?

Answer 25

The delay from policy decisions to implementation.

Question 26

What is “Impact Lag”?

Answer 26

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