Fiscal Policy Options Flashcards
(20 cards)
What is the central idea of classical economics?
Free markets regulate themselves as individuals act in self-interest controlling supply and demand
Name three economists associated with classical economics.
- Adam Smith
- David Ricardo
- Thomas Malthus
What economic crisis challenged classical economics?
The Great Depression
What major flaw of classical economics was highlighted by the Great Depression?
It didn’t address how long it would take for the market to return to equilibrium
Who developed Keynesian economics and in what work?
John Maynard Keynes in ‘The General Theory of Employment, Interest, and Money’
What is the focus of Keynesian economics?
Demand-side theory as the basis for encouraging government action
Define productive capacity.
The maximum output that an economy can sustain over a period without increasing inflation
What did Keynes argue was necessary to end the Depression?
Someone needed to start spending
What role did Keynes believe the government should play in the economy?
Spend more money to boost demand
What is demand-side economics?
A school of thought based on the idea that demand for goods drives the economy
How can fiscal policy be used to combat recessions?
By increasing government spending or cutting taxes
What is the multiplier effect in Keynesian economics?
Every one dollar change in fiscal policy creates a change greater than one dollar in national income
Define automatic stabilizers.
Tools of fiscal policy that increase or decrease automatically depending on changes in GDP and personal income
What is the main idea of supply-side economics?
The supply of goods, such as taxation, drives the economy
What does the Laffer curve illustrate?
The relationship between the tax rate set by the government and the total tax revenue collected
What was a significant outcome of government spending during WWII?
It moved the country sharply out of the Great Depression
What is the Council of Economic Advisers (CEA)?
A group of three respected economists advising the President on economic policy
Who was Kennedy’s chief financial advisor?
Walter Heller
What economic strategy did President Ronald Reagan propose?
A tax cut that reduced taxes by 25 percent over three years
True or False: Reagan believed that the government should spend its way out of a recession.
False
