Lectures 17 and 18

Question 1

What is fiscal policy?

Answer 1

changes to taxes and government spending to pursue a macroeconomic objective

Question 2

Who conducts fiscal policy?In

Answer 2

the government- POTUS and Congress

Question 3

What can be changed by fiscal policy?

Answer 3

Taxes and government spending

Question 4

What two things make up the federal budget?

Answer 4

Receipts and outlays

Question 5

What makes up receipts?

Answer 5

Personal Income Tax
Social Security + payroll taxes
Corporate Income Tax
Indirect taxes and other receipts (excise taxes, passport tax, gasoline tax)

Question 6

What makes up outlays?

Answer 6

Transfer Payments
Expenditure on goods and services
Interest payments on federal debt

Question 7

What are some examples of transfer payments?

Answer 7

Social security BENEFITS
TANF
EBT

Question 8

What is a budget deficit?

Answer 8

When government outlays (spending) is greater than receipts (revenue)

Question 9

How does the government finance a deficit?

Answer 9

By selling bills, notes, and bonds

Question 10

What are the two types of fiscal policy?

Answer 10

Automatic
Discretionary

Question 11

What can the government due to facilitate an expansionary fiscal policy?

Answer 11

Increase government spending
Reduce taxes

Question 12

When is an expansionary fiscal policy put in place?

Answer 12

During a recessionary gap

Question 13

What does an expansionary gap lead to?

Answer 13

increase in real GDP and employment

Question 14

What can the government due to facilitate a contractionary fiscal policy?

Answer 14

Reduce government spending
Increase taxes

Question 15

When is a contractionary policy put in place?

Answer 15

During an inflationary/expansionary gap

Question 16

What does a contractionary gap lead to?

Answer 16

A reduction in real GDP and employment

Question 17

Why would economists want to fix an inflationary gap?

Answer 17

Reduce inflation
minimize a future recession (business cycle)
control the budget deficit

Question 18

How do automatic fiscal policies operate?

Answer 18

In the opposite way as the causation

Question 19

When the economy is experiencing a recessionary gap, automatic fiscal policy is….

Answer 19

EXPANSIONARY

Question 20

What happens during an expansionary automatic fiscal policy?

Answer 20

Tax receipts fall
Needs-tested spending increases

Question 21

What happens during a contractionary automatic fiscal policy?

Answer 21

Tax receipts increase due to higher incomes
Needs-tested spending decreases

Question 22

What kind of policy is reducing the income tax?

Answer 22

Expansionary

Question 23

What are two ways workers can get more income?

Answer 23

Decrease in income tax
Increase in pay

Question 24

What happens if the government reduces the income tax?

Answer 24

Employment rises
Real GDP rises

Question 25

What kind of policy is reducing the capital gains tax?

Answer 25

Expansionary

Question 26

What are two tax reductions as discretionary fiscal policy that cause an expansionary gap?

Answer 26

Reducing the income tax and the capital gains

Question 27

What happens to the real interest rate when you reduce the capital gains tax?

Answer 27

The real interest rate falls

Question 28

What happens to the equilibrium quantity of funds when you reduce the capital gains tax?

Answer 28

The equilibrium quantity of funds increases

Question 29

What line moves when you reduce the capital gains tax?

Answer 29

The supply line shifts to the right

Question 30

What line moves when you reduce the income tax?

Answer 30

The supply line shifts to the right

Question 31

Is the government spending multiplier positive or negative?

Answer 31

Positive

Question 32

Why is the government spending multiplier positive?

Answer 32

Increases in spending leads to increases in real GDP

Question 33

Is the tax multiplier positive or negative?

Answer 33

Negative

Question 34

Why is the tax multiplier negative?

Answer 34

Increases in tax receipts lead to a reduction in real GDP

Question 35

Which multiplier has a larger effect?

Answer 35

The government spending multiplier

Question 36

How do you obtain the balanced budget multiplier?

Answer 36

By getting the sum of the two multipliers (government spending and tax)