Term
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Definition
| Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. |
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Term
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Definition
| Government spending and taxes that automatically increase or decrease along with the business cycle. |
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Term
| What does contractionary fiscal policy involve? |
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Definition
| Contractionary fiscal policy involves decreasing government purchases or increasing taxes. |
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Term
| Why do economists refer to the initial increase in government purchases as autonomous? |
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Definition
| Economists refer to the initial increase in government purchases as autonomous because it is a result of a decision by the government and is not directly caused by changes in the level of real GDP. |
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Term
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Definition
| The series of induced increases in consumption spending that results from an initial increase in autonomous expenditures. |
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Term
| Figure 16.8. The Multiplier Effect and Aggregate Demand |
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Definition
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Term
| Figure 16.9 The Multiplier Effect of an Increase in Government Purchases |
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Definition
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Term
| Categories of Federal Government Expenditures: 1. Interest |
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Definition
| Interest on the national debt, which represents payments to holders of the bonds the federal government has issued to borrow money. |
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Term
| Categories of Federal Government Expenditures: 2. Grants |
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Definition
| Grants to state and local governments, which are payments made by the federal government to support government activity at the state and local levels. |
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Term
| Categories of Federal Government Expenditures: 3. Transfer Payments |
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Definition
| Transfer payments, which include Social Security, Medicare, unemployment insurance, and programs to aid the poor, is the largest and fastest-growing category of federal expenditures. |
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Term
| government purchases multiplier |
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Definition
| The ratio of the change in equilibrium real GDP to the initial change in government purchases |
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Term
| government purchases multiplier= _____ divided by _______ |
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Definition
| Change in equilibrium real GDP/ Change in government purchases |
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Term
| Do tax cuts also have a multiplier effect? |
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Definition
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Term
| With the tax rate remaining unchanged, the expression for the tax multiplier is |
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Definition
| Change in equilibrium real GDP/ Changes in taxes |
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Term
| Is the tax multiplier a positive or negative number? Why? |
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Definition
The tax multiplier is a Negative number because changes in taxes and changes in real GDP move in opposite directions:
An increase in taxes reduces disposable income, consumption, and real GDP,
and a decrease in taxes raises these.
We would expect the tax multiplier to be smaller in absolute value than the government purchases multiplier. |
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Term
| A change in tax rates has a _____ ___________ effect on equilibrium real GDP than does a tax cut of a fixed amount. |
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Definition
| A change in tax rates has a more complicated effect on equilibrium real GDP than does a tax cut of a fixed amount. |
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Term
| The higher the tax rate, the _________ the multiplier effect. |
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Definition
| The higher the tax rate, the smaller the multiplier effect. |
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Term
| A cut in tax rates affects equilibrium real GDP through two channels: |
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Definition
1. A cut in tax rates increases the disposable income of households, which leads them to increase their consumption spending.
2. A cut in tax rates increases the size of the multiplier effect. |
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Term
| Figure 16.10 Taking into Account the Effects of Aggregate Supply |
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Definition
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Term
| Increases in government purchases and cuts in taxes have a ________ multiplier effect on equilibrium real GDP. |
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Definition
| Increases in government purchases and cuts in taxes have a positive multiplier effect on equilibrium real GDP. |
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Term
| Decreases in government purchases and increases in taxes also have a multiplier effect on equilibrium real GDP, but in this case, the effect is __________. |
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Definition
| Decreases in government purchases and increases in taxes also have a multiplier effect on equilibrium real GDP, but in this case, the effect is negative. |
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Term
| Getting the timing right can be more difficult with fiscal policy than with monetary policy for two main reasons: |
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Definition
1. The delays caused by the legislative process can be very long.
2. Even after a change in fiscal policy has been approved, it takes time to implement the policy. |
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Term
| Does Government Spending Reduce Private Spending? |
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Definition
| The size of the multiplier effect may be limited if the increase in government purchases causes one of the nongovernment, or private, components of aggregate expenditures—consumption, investment, or net exports—to fall. |
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Term
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Definition
| A decline in private expenditures as a result of an increase in government purchases. |
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Term
| Crowding Out in the Long Run |
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Definition
The long-run effect of a permanent increase in government spending is complete crowding out, where the decline in investment, consumption, and net exports exactly offsets the increase in government purchases, and aggregate demand remains unchanged.
In the long run, the economy returns to potential GDP. |
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Term
| Fiscal Policy in Action: Did the Stimulus Package of 2009 Work? |
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Definition
Congress enacted a tax cut totaling $95 billion that took the form of rebates of taxes already paid that were sent to taxpayers between April and July 2008.
One-time tax rebates increase consumers’ current income but not their permanent income, which reflects their expected future income.
Since only a permanent decrease in taxes increases consumers’ permanent income, a tax rebate is likely to increase consumption spending less than would a permanent tax cut. |
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Term
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Definition
| The situation in which the government’s expenditures are greater than its tax revenue. |
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Term
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Definition
| The situation in which the government’s expenditures are less than its tax revenue. |
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Term
| How the Federal Budget Can Serve as an Automatic Stabilizer |
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Definition
Discretionary fiscal policy can increase the federal budget deficit during recessions by increasing spending or cutting taxes to increase aggregate demand.
Most of the increase in the federal budget deficit during a typical recession takes place without Congress and the president taking any action, but is instead due to the effects of the automatic stabilizers. |
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Term
| Deficits occur automatically during recessions for two reasons: |
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Definition
1. During a recession, wages and profits fall, causing government tax revenues to fall.
2. The government automatically increases its spending on transfer payments when the economy moves into recession. |
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Term
| Cyclically adjusted budget deficit or surplus |
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Definition
| The deficit or surplus in the federal government’s budget if the economy were at potential GDP. |
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Term
| Should the Federal Budget Always Be Balanced? |
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Definition
Many economists believe that it is a good idea for the federal government to have a balanced budget when the economy is at potential GDP.
But few economists believe that the federal government should attempt to balance its budget every year because it might have to take actions that would destabilize the economy.
Some economists argue that the federal government should normally run a deficit, even at potential GDP. |
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Term
| Why is the federal government not in danger of defaulting on its debt? |
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Definition
| The federal government is not in danger of defaulting on its debt because it can raise the funds it needs through taxes or spending cuts to make the interest payments on the debt, which are currently about 10 percent of total federal expenditures. |
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Term
| What happens if an increasing debt drives up interest rates? |
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Definition
| If an increasing debt drives up interest rates, crowding out of investment spending may occur, which means a lower capital stock in the long run and a reduced capacity of the economy to produce goods and services. |
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Term
| Why are fiscal policy actions sometimes referred to as supply-side economics? |
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Definition
| Because fiscal policy actions primarily affect aggregate supply rather than aggregate demand, they are sometimes referred to as supply-side economics. |
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Term
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Definition
The difference between the pretax and posttax return to an economic activity.
The tax wedge applies to the marginal tax rate, which is the fraction of each additional dollar of income that must be paid in taxes. |
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Term
| Define individual income tax. What effect would cutting this tax rate have on aggregate supply? |
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Definition
• Individual income tax: Sole proprietorships’ profits and households’ returns from saving are taxed at the individual income tax rates.
So, cutting these rates not only reduces the tax wedge faced by workers, thereby increasing the quantity of labor supplied, but also raises the return to entrepreneurship, encouraging the opening of new businesses, and increases the return to saving. |
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Term
| Define corporate income tax. What effect would cutting this tax rate have on aggregate supply? |
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Definition
• Corporate income tax: The federal government taxes the profits earned by corporations under the corporate income tax.
Cutting the marginal corporate income tax rate would encourage investment spending by increasing the return corporations receive from new investment goods, potentially increasing the pace of technological change if innovations are embodied in these goods. |
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Term
| What are taxes on dividends and capital gains. What effect would cutting this tax rate have on aggregate supply? |
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Definition
• Taxes on dividends and capital gains: Corporations distribute some of their profits in the form of payments known as dividends to shareholders, who may benefit from higher corporate profits by receiving capital gains, which are increases in the prices of assets.
Lowering the tax rates on dividends and capital gains increases the supply of loanable funds from households to firms, increasing saving and investment and lowering the equilibrium real interest rate. |
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Term
| How are there potential gains from tax simplification? |
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Definition
If the tax code were greatly simplified, the economic resources currently used by the tax preparation industry would be available to produce other goods and services.
In addition to wasting resources, the complexity of the tax code may also distort the decisions made by households and firms.
A simplified tax code would increase economic efficiency by reducing the number of decisions households and firms make solely to reduce their tax payments. |
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Term
| Why would most economists would agree that there are supply-side effects to reducing taxes? |
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Definition
Decreasing marginal income tax rates will increase the quantity of labor supplied, cutting the corporate income tax will increase investment spending,
and so on. |
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Term
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Definition
an economic model written in the form of equations,
where each equation has been statistically estimated, using methods similar to those used in estimating demand curves.
Economists rely on this type of model to forecast the effect of a change in spending or taxes,
they often rely on |
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