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Economics 201 Ch 9

Principles of Economics Ch 9

QuestionAnswer
Fiscal Policy Changes in government expenditures and taxation to achieve macroeconomics goals.
Budget Deficit When government expenditures are greater than tax revenues.
Budget Surplus When tax revenues are greater than government expenditures.
Changes in fiscal policy effect: The federal government's budget.
According to Keynesian theory, the government may be able to move the level of Total Expenditures toward the ideal level (and move Real GDP toward Natural Real GDP) by: Using fiscal policy.
Keynesian theory calls for the use of deficit spending to: Close a recessionary gap.
Keynesian theory calls for the use of deficit surplus to: Close a inflationary gap.
Automatic Stabilizers Taxes and transfer payments that automatically tend to move equilibrium Real GDP toward Natural Real GDP.
What are the four potential problems with fiscal policy? 1. There may be a political bias toward expansionary fiscal policy at all times. 2. Crowding out may occur. 3. Fiscal policy may be mistimed because of lags. 4. Fiscal policy may be miscalculated.
Crowding Out Occurs when increases in government spending lead to decreases in private spending.
What are the three different lags? 1. The information lag. 2. The policy lag. 3. The impact lag.
If increased government spending is paid for with increased taxes: This will mainly reduce consumption.
If increased government spending is paid for with deficit spending: This will mainly reduce investment.
Information Lag Government policymakers have access to information about upturns or downturns in the business cycle only after some time has passed.
Policy Lag Enacting a change in fiscal policy ( a tax cut, a new spending program) takes time.
Impact Lag Once a change in fiscal policy is enacted, it takes time before the new policy has its full effect on Real GDP.
Supply-Side Economics It emphasizes long run economic growth rather than short run economic stability.
Supply-side economists argue that: Keynesian fiscal policy has had a harmful effect on the supply side of the economy.
Supply-side economists support: Lowering marginal taxes rates.
Laffer Curve Indicates that lowering tax rates may increase tax revenue.
Created by: dengler
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