Study Fiscal Policy and Government Budgets with 12 free online flashcards. Review key terms, definitions, and concepts with this interactive flashcard deck.
What is fiscal policy, and who primarily determines it in the United States?
Fiscal policy is the use of government spending and taxation to influence economic activity. In the United States, Congress and the president primarily determine it, while the Federal Reserve conducts monetary policy.
How does fiscal policy affect aggregate demand through the expenditure identity?
The identity is Y = C + I + G + NX. An increase in government purchases directly raises aggregate demand, while tax cuts and transfer increases affect demand indirectly through disposable income and consumption.
What distinguishes expansionary from contractionary fiscal policy?
Expansionary policy raises demand through higher purchases, lower taxes, or higher transfers. Contractionary policy lowers demand through lower purchases, higher taxes, or lower transfers.
Which government expenditures count directly as government purchases in GDP?
Government purchases of currently produced goods and services count directly in GDP; transfer and interest payments do not. A highway project, for example, counts as government investment during construction.
Why does a tax cut usually increase consumption by less than its full value?
Disposable income is Yd = Y − T. A tax cut usually increases consumption, but not one-for-one because households generally save part of the additional disposable income.
How are a government budget deficit and surplus identified?
The simplified budget balance is T − (G + TR). A deficit occurs when G + TR > T; a surplus occurs when T > G + TR.
What is the difference between a budget deficit and public debt?
A deficit is a flow measured over a period, such as a fiscal year. Public debt is a stock measured at a point in time; repeated deficits generally add to it.
How does a cyclical deficit differ from a structural deficit?
A cyclical deficit arises from recession effects such as falling tax revenue and rising unemployment benefits. A structural deficit would remain near potential GDP and reflects persistent policy choices.
How do automatic stabilizers support aggregate demand during a recession?
Automatic stabilizers change taxes and spending without new legislation. In a recession, tax revenue falls and unemployment-related spending rises, supporting disposable income and aggregate demand.
What are the inside and outside lags of discretionary fiscal policy?
Discretionary fiscal policy requires deliberate legislative changes. Its inside lag runs from recognizing a problem to taking action; its outside lag runs from implementation to the full economic effect.
How is the government-purchases multiplier calculated when MPC = 0.75?
The simple government-purchases multiplier is 1/(1 − MPC). With MPC = 0.75, it equals 4, so a $10 billion increase in purchases could raise equilibrium GDP by $40 billion in the simplified model.
Why is the tax multiplier smaller in absolute value than the purchases multiplier?
The tax multiplier is −MPC/(1 − MPC), and the transfer-payment multiplier is MPC/(1 − MPC). Both are smaller in absolute value than the purchases multiplier because households save part of the added income.