Module 14.2- Fiscal Policy Tools And Implementation Flashcards
(24 cards)
What are the two main categories of fiscal policy tools?
Spending tools and revenue tools
Spending tools include transfer payments, current spending, and capital spending. Revenue tools include direct and indirect taxes.
What are transfer payments?
Payments that redistribute wealth, such as Social Security and unemployment insurance benefits
Transfer payments are not included in GDP computations.
Define current spending in the context of fiscal policy.
Government purchases of goods and services on an ongoing basis.
What is capital spending?
Government spending on infrastructure to enhance future productivity.
Examples include roads, schools, bridges, and hospitals.
What is one goal of spending tools in fiscal policy?
To provide services such as national defense that benefit all residents.
What are direct taxes?
Taxes levied on income or wealth, such as income taxes and corporate taxes.
What are indirect taxes?
Taxes levied on goods and services, such as sales taxes and excise taxes.
List desirable attributes of tax policy.
- Simplicity
- Efficiency
- Fairness
- Sufficiency
True or False: Indirect taxes can be implemented quickly to increase government revenues.
True
What are two disadvantages of fiscal policy tools?
Direct taxes and transfer payments take time to implement.
Capital spending also takes time to implement.
How do spending tools affect aggregate demand compared to tax reductions?
Spending tools are more effective in increasing aggregate demand than tax reductions.
What is the fiscal multiplier?
A measure of the potential increase in aggregate demand resulting from an increase in government spending.
What is the formula for calculating the fiscal multiplier?
fiscal multiplier = 1 - MPC(1 - t)
Here, MPC is the marginal propensity to consume and t is the tax rate.
What is Ricardian equivalence?
The theory that taxpayers may increase savings to offset expected future tax increases from current deficits.
What is discretionary fiscal policy?
Fiscal policy implemented through deliberate changes in taxes and spending.
Name the three types of lags associated with discretionary fiscal policy.
- Recognition lag
- Action lag
- Impact lag
What can happen if fiscal policy is implemented too late during a recession?
The economy may already be recovering, making the stimulus unnecessary.
What is the crowding-out effect?
Expansionary fiscal policy may lead to higher interest rates, reducing private investment.
What is the balanced budget multiplier?
The net effect on aggregate demand when an increase in government spending is offset by an increase in taxes.
How can one determine if fiscal policy is expansionary or contractionary?
By examining changes in the budget surplus or deficit.
Fill in the blank: An increase in a revenue item should be considered _______.
contractionary
Fill in the blank: An increase in a spending item should be considered _______.
expansionary
What is the structural budget deficit?
The deficit that would occur based on current policies if the economy were at full employment.
What are the goals of spending tools?
-Invest in infrastructure to enhance economic growth.
-Support the country’s growth and unemployment targets by affecting aggregate demand.
-Provide minimum standard of living.
-Subsidize investment in research and development for certain high risk ventures consistent with future economic growth or goals.
