Macro Economics Chapter 11 Power Point

Question 1

What is a discretionary fiscal policy?

Answer 1

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

Question 2

What are examples of expansionary fiscal policy?

Answer 2

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

Question 3

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

Answer 3

aggregate demandprice levelreal GDP

Question 4

What is the spending multiplier?

Answer 4

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

Question 5

How is the spending multiplier calculated?

Answer 5

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

Question 6

What is marginal propensity to consume?

Answer 6

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

Question 7

What is marginal propensity to save?

Answer 7

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

Question 8

If MPC is 0.75, what is MPS?

Answer 8

.25

Question 9

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

Answer 9

1/MPS = 1/1/4 = 4

Question 10

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

Answer 10

4 x $50B = $200B

Question 11

What is the tax multiplier?

Answer 11

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

Question 12

What happens when government cuts taxes by $50 billion?

Answer 12

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

Question 13

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

Answer 13

• smaller- aggregate demand - government spending

Question 14

What is the formula for the tax multiplier?

Answer 14

1 – spending multiplier

Question 15

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

Answer 15

1 – spending multiplier = – 3

Question 16

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

Answer 16

3 x $50B = $150B

Question 17

Can we assume that the MPC will remain fixed?

Answer 17

No, it can change from one time period to another

Question 18

Can fiscal policy be used to combat inflation?

Answer 18

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

Question 19

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

Answer 19

• aggregate demand - price level

Question 20

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

Answer 20

−$25B x 4 = −$100B

Question 21

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

Answer 21

$33.3B x −3 = −$100B

Question 22

What is the balanced budget multiplier?

Answer 22

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

Question 23

What is an automatic stabilizer?

Answer 23

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

Question 24

What are examples of automatic stabilizers?

Answer 24

•Transfer payments•Unemployment compensation•Welfare

Question 25

What is a budget surplus?

Answer 25

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

Question 26

What is a budget deficit?

Answer 26

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

Question 27

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

Answer 27

• rise- fall- inflation

Question 28

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

Answer 28

• falls- rise- recession

Question 29

What is supply-side fiscal policy?

Answer 29

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

Question 30

What is the purpose of supply-side fiscal policies?

Answer 30

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

Question 31

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

Answer 31

• decrease - Increase

Question 32

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

Answer 32

aggregate supply curve

Question 33

What is the Laffer Curve?

Answer 33

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

Question 34

Will an increase in taxes lead to higher government revenues?

Answer 34

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

Question 35

What happens if taxes increase beyond a certain point?

Answer 35

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

Question 36

Why does the economic pie begin to shrink?

Answer 36

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