# Macro Economics Chapter 11 Power Point Flashcards

1
Q

What is a discretionary fiscal policy?

A

The deliberate use of changes in government spending or taxes to alter aggregate demand

2
Q

What are examples of expansionary fiscal policy?

A

•Increase government spending•Decrease taxes•Increase government spending and taxes equally

3
Q

An Increase in government spending leads to an Increase in the __________ _________ curve. Than an increase in the ________ _______ and the _____ ____.

A

aggregate demandprice levelreal GDP

4
Q

What is the spending multiplier?

A

Any initial change in spending leads to a chain reaction of more spending which causes a greater change in demand.

5
Q

How is the spending multiplier calculated?

A

The ratio of the change in real GDP to an initial change in aggregate expenditure.

6
Q

What is marginal propensity to consume?

A

MPC is the change in consumption resulting from a change in income.

7
Q

What is marginal propensity to save?

A

MPS is the change in saving resulting from a change in income.

8
Q

If MPC is 0.75, what is MPS?

A

.25

9
Q

With an MPC of 0.75, what is the spending multiplier?

A

1/MPS = 1/1/4 = 4

10
Q

How much will real GDP increase with an increase in government spending of \$50 billion?

A

4 x \$50B = \$200B

11
Q

What is the tax multiplier?

A

The change in aggregate demand (total spending) resulting from an initial change in taxes.

12
Q

What happens when government cuts taxes by \$50 billion?

A

The multiplier process is less because initial spending increases only by \$38B instead of \$50B

13
Q

What is the conclusion?A tax cut has a _________ multiplier effect on _________ _________than an equal increase in __________ __________..

A
• smaller- aggregate demand - government spending
14
Q

What is the formula for the tax multiplier?

A

1 – spending multiplier

15
Q

With a spending multiplier of 4 what is the tax multiplier?

A

1 – spending multiplier = – 3

16
Q

How much does real GDP increase by with a cut in taxes of \$50B?

A

3 x \$50B = \$150B

17
Q

Can we assume that the MPC will remain fixed?

A

No, it can change from one time period to another

18
Q

Can fiscal policy be used to combat inflation?

A

Yes, this would happen when the economy is operating in the intermediate range of the aggregate supply curve.

19
Q

A decrease in government spending or increase in taxes leads to decrease in the ________ _______ curve and a decrease in the _______ _______.

A
• aggregate demand - price level
20
Q

What will happen to AD with a cut in G spending of \$25B? (Spending Multiplier of 4)

A

−\$25B x 4 = −\$100B

21
Q

What will happen to AD with a cut in taxes of \$33.3B? (Spending Multiplier of 4)

A

\$33.3B x −3 = −\$100B

22
Q

What is the balanced budget multiplier?

A

An equal change in government spending and taxes will change aggregate demand by the amount of the change in government spending.

23
Q

What is an automatic stabilizer?

A

Federal expenditures and tax revenues that automatically change levels in order to stabilize an economic expansion or contraction.

24
Q

What are examples of automatic stabilizers?

A

•Transfer payments•Unemployment compensation•Welfare

25
Q

What is a budget surplus?

A

A budget in which government revenues exceed government expenditures in a given time period.

26
Q

What is a budget deficit?

A

A budget in which government expenditures exceed government revenues in a given time period.

27
Q

Increase in real GDP leads to a tax collection _____ and government transfer payments _____. Budget surplus offsets _______.

A
• rise- fall- inflation
28
Q

Decrease in real GDP leads to a tax collection _____ and government transfer payments _____. Budget deficit offsets _______.

A
• falls- rise- recession
29
Q

What is supply-side fiscal policy?

A

A fiscal policy that emphasizes government policies that increase aggregate supply.

30
Q

What is the purpose of supply-side fiscal policies?

A

To achieve long-run growth in real output, full employment, and a lower price level.

31
Q

Increase in government spending leads to a __________ in net taxes and an ___________ in the aggregate demand curve.

A
• decrease - Increase
32
Q

A decrease in resource prices; technological advances; subsidies; decrease in regulations, leads to an Increase in the _________ _______ _________.

A

aggregate supply curve

33
Q

What is the Laffer Curve?

A

Puts forth the idea that increasing taxes from zero will increase tax revenues up to a certain point.

34
Q

Will an increase in taxes lead to higher government revenues?

A

That depends on where the economy is on the Laffer Curve.

35
Q

What happens if taxes increase beyond a certain point?

A

Tax revenues begin to decline as the economic pie begins to shrink.

36
Q

Why does the economic pie begin to shrink?

A

Workers have less incentive to work and investors have less of an incentive to invest as their taxes increase beyond a certain level.