ECN 204 Lecture 8: Fiscal Policy

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blushfrog753

28 Jun 2018

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Alexandra Karkaby

07/03/18 Week 8

Fiscal Policy

● Fiscal policy involves government decisions about spending and taxation.

● These decision have major impacts on AD

○ Decisions to increase spending directly increase AD.

○ Decisions to increase taxes lead indirectly to decreased AD

● Governments may strategically make fiscal policy decisions to affect the business cycle.

● Expansionary fiscal policy

○ Involves increasing spending and/or decreasing taxes.

○ Used to close a recessionary gap

● Contractionary fiscal policy

○ Involves decreasing spending and/or increases taxes

○ Used to close an expansionary gap (not popular).

Government Budgets

● Decisions about spending and taxation will impact the governments balance budget.

●Balance budget → tax revenues - spending

○ Budget surplus → revenues > spending (positive balance)

○ Budget deficit → revenues < spending (negative balance)

Government Debt

● Consistently having budget deficits will accumulate massive amounts of debt.

● Governments with a large debt need to devote a large share of their spending just to pay

interest on that debt.

○ Only when a country has a budget surplus can they start paying off the debt.

The impact of FIscal Policy Changes on The Budget

● An expansionary fiscal policy will worsen a government's budget position.

● Governments typically need to borrow to finance an expansionary fiscal policy.

○ This will push up interests rates which leads to less demand from households

and businesses thereby partially offsetting the expansionary fiscal policy

(crowding out).

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Document Summary

Fiscal policy involves government decisions about spending and taxation. These decision have major impacts on ad. Decisions to increase spending directly increase ad. Decisions to increase taxes lead indirectly to decreased ad. Governments may strategically make fiscal policy decisions to affect the business cycle. Used to close an expansionary gap (not popular). Decisions about spending and taxation will impact the governments balance budget. Balance budget tax revenues - spending. Budget surplus revenues > spending (positive balance) Budget deficit revenues < spending (negative balance) Consistently having budget deficits will accumulate massive amounts of debt. Governments with a large debt need to devote a large share of their spending just to pay interest on that debt. Only when a country has a budget surplus can they start paying off the debt. The impact of fiscal policy changes on the budget. An expansionary fiscal policy will worsen a government"s budget position. Governments typically need to borrow to finance an expansionary fiscal policy.

Related Questions

Which of the following statement(s) about fiscal policy is/are true?

		A fiscal policy action to close a recessionary gap is to decrease taxes
		Fiscal policy may require time before it takes effect (lags)
		Expansionary fiscal policy can be achieved by increases in transfer payments and decreasing government purchases to pay for it.
		One potential problem with using fiscal policy to close recessionary output gaps is that sustained government deficits can be harmful to long-run economic growth.
		Fiscal policy may affect potential output as well as potential spending.
		The choices of government spending have little effect on fiscal policy since government spending is tied directly to the business cycle through Y=C+I+G+NX.
		A fiscal policy action to close an expansionary gap is to decrease government purchases
		Balanced budget fiscal policy is more effective than borrowing or re-paying government debt.

ceruleanmuskrat915

Fiscal policy is carried out primarily by

A) the Federal government.

B) state and local governments working together.

C) state governments alone.

D) local governments alone.

Fiscal policy refers to the:

A) manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

B) manipulation of government spending and taxes to achieve greater equality in the distribution of income.

C) altering the interest rate to change aggregate demand.

D) fact that equal increases in government spending and taxation will be contractionary.

Expansionary fiscal policy is so named because it:

A) involves an expansion of the nation's money supply.

B) necessarily expands the size of government.

C) is aimed at achieving greater price stability.

D) is designed to expand real GDP.

An appropriate fiscal policy for severe demand-pull inflation is:

A) an increase in government spending.

B) depreciation of the dollar.

C) a reduction in interest rates.

D) a tax rate increase.

29. The amount by which government expenditures exceed revenues during a particular year is the:

A) public debt.

B) budget deficit.

C) full-employment.

D) GDP gap.

30. If actual GDP is greater than potential GDP, we have

A) a negative GDP gap

B) a positive GDP gap

C) minimum GDP gap

D) maximum GDP gap

31. Money functions as:

A) a store of value.

B) a unit of account.

C) a medium of exchange

D) all of the choices

pinkhedgehog911

Which of the following statements is not correct?

Select one:

a. An increase in government spending raises the equilibrium level of income by a multiple of the original spending increase.

b. Government spending is part of fiscal policy.

c. A decline in government spending brings about a contraction in the economy.

d. Government spending is a means to close a recessionary gap.

e. An increase in government spending shifts the AD curve downward by a fraction of the rise in government spending.

Which of the following was not a cause of the U.S. budget deficits in the 1980s?

Select one:

a. Recessions in the early 1980s

b. A substantial increase in government spending

c. Expansion of existing government programs

d. A substantial decrease in tax rates

e. A relatively constant level of taxation

Which of the following does not qualify as an automatic stabilizer?

Select one:

a. Proportional income taxes

b. Food stamps

c. Welfare payments

d. Progressive income taxes

e. Unemployment compensation

Income taxes affect aggregate demand

Select one:

a. indirectly by changing consumption.

b. indirectly by changing investment spending.

c. indirectly by changing net exports.

d. directly by changing disposable income.

e. directly through government spending.

Which of the following constitutes a direct tax?

Select one:

a. Personal income taxes

b. Sales taxes

c. Excise taxes

d. Trade tariffs

e. Value-added taxes

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ECN 204 Lecture 8: Fiscal Policy

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