EC 202 Lecture Notes - Lecture 18: Fiscal Policy, Procyclical And Countercyclical

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19 Sep 2016

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Policy related to government spending, taxation, and borrowing. Collects a greater share from those with high incomes. Flat percentage of the income earned, regardless of the level of income. People with higher incomes pay a smaller share of their income in tax. Each year, the government runs a deficit or a surplus. The total accumulated amount that the government has borrowed and not yet paid back over time. Increase ad through increases in government spending and/or decreases in taxes. Decreases ad through cuts in government spending and/or increase in taxes. Fiscal policy takes place in one of two ways. When government passes a new law that explicitly changes overall tax or spending levels. Tax and spending increasing ad when the economy slows down and decreasing ad when the economy speeds up, without any additional change in legislation without any additional change in legislation. Automatic stabilizers offset only a part of the original shift in.

Related Questions

1.If individual income tax accounts for more total revenue than the payroll tax in the U.S., why would over half the households in the country pay more in payroll taxes than in income taxes?

		income tax is a proportional tax
		income tax is a progressive tax
		payroll tax is a regressive tax
		payroll tax is a progressive tax

2.If the state of Washington's government collects $75 billion in tax revenues in 2013 and total spending in the same year is $74.8 billion, the result will be a:

		budget deficit.
		budget surplus.
		the decrease in the payroll tax.
		the decrease in proportional taxes.

3.If South Dakota's governor reports a budget surplus in 2011, that state government likely:

		received more in taxes than it spent in that year.
		increased the proportional tax level.
		equalized spending and taxes in that year.
		increased the corporate income tax rate.

4.If government tax policy requires Peter to pay $15,000 in tax on the annual income of $200,000 and Paul to pay $10,000 in tax on the annual income of $100,000, then the tax policy is:

		optional.
		progressive.
		proportional.
		regressive.

5.In 2010, Microsoft will pay corporate income tax to the federal government based on the company's __________________.

		proportional tax rate
		corporate profits
		optional tax rate
		excise profits

taupealligator611

1. If government tax policy requires Jane to pay $28,000 in taxes on an annual income of $200,000 and Mary to pay $10,000 in tax on the annual income of $100,000, then the tax policy is:

		regressive.
		progressive.
		proportional.
		optional.

2. When increasing oil prices cause aggregate supply to shift to the left, then:

		unemployment and inflation decrease.
		unemployment decreases and inflation increases.
		unemployment and inflation increase.
		unemployment increases and inflation decreases.

3. What do goods like gasoline, tobacco, and alcohol typically share in common?

		A progressive tax is imposed on each of them.
		A regressive tax is imposed on each of them.
		They are all subject to government excise taxes.
		They are all subject to government fiscal taxes.

4. When inflation begins to climb to unacceptable levels in the economy, the government should:

		use contractionary fiscal policy to shift aggregate demand to the right.
		use contractionary fiscal policy to shift aggregate demand to the left.
		use expansionary fiscal policy to shift aggregate demand to the right.
		use expansionary fiscal policy to shift aggregate demand to the left.

rubykangaroo105

1.Ceteris paribus, if the U.S. federal government reduces its budget deficit which of the following will be observed?

Answer

	a.	The aggregate demand curve will shift to the right.
	b.	The economy will always approach potential GDP.
	c.	The marginal propensity to consume will increase.
	d.	The average price level will increase.
	e.	The aggregate demand curve will shift to the left.

2. If the government wants to close a GDP gap, it can:

Answer

	a.	lower government spending on social security.
	b.	adopt contractionary fiscal policies to control inflation.
	c.	increase its budget deficit.
	d.	repay its borrowings.
	e.	raise both direct and indirect tax rates.

3. Suppose the short-run equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and price level. This can be accomplished by:

Answer

	a.	lowering average tax rates such that aggregate supply is increased.
	b.	increasing government spending such that aggregate expenditures are increased.
	c.	increasing transfer payments such that aggregate expenditures decline.
	d.	raising taxes and government spending by the same amount such that aggregate supply is decreased and aggregate demand is increased.
	e.	decreasing government spending such that aggregate demand is reduced.

4. A drop in investment spending caused by increased government budget deficits is referred to as:

Answer

	a.	the multiplier effect.
	b.	crowding out.
	c.	an expansionary gap.
	d.	the paradox of thrift.
	e.	the Ricardian equivalence.

5. Discretionary fiscal policy is best defined as:

Answer

	a.	the deliberate manipulation of the money supply to expand the economy.
	b.	the deliberate change in tax laws and government spending to change equilibrium income.
	c.	the policy action taken by the Congress to reduce the federal budget deficit.
	d.	the arbitrary fluctuation in tax laws and budget requirements.
	e.	the automatic change in certain fiscal instruments when real GDP changes.

6. Which of the following can be considered as an automatic stabilizer in the economy?

Answer

	a.	Money supply
	b.	Disposable income
	c.	Real exchange rate
	d.	Real interest rate
	e.	Unemployment insurance

7. Which of the following is true about automatic stabilizers?

Answer

	a.	When income rises, automatic stabilizers increase/boost spending.
	b.	Automatic stabilizers are a part of discretionary fiscal policy.
	c.	An automatic stabilizer is any program that responds to fluctuations in the business cycle in a way that moderates the effects of those fluctuations.
	d.	Any kind of trade policy adopted by the government will be considered as an automatic stabilizer.
	e.	The interest rate is an example of an automatic stabilizer.

8. Increased budget deficits

Answer

	a.	can cause interest rates to increase and hence decrease net exports
	b.	have no effect on net exports
	c.	can cause interest rates to decrease and hence increase net exports
	d.	never impose additional interest costs on the government

9. The Ricadian Equivalence implies that when financing additional government expenditures

Answer

	a.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will decrease either way.
	b.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will increase either way.
	c.	increasing borrowing is the best option
	d.	increasing current taxes is the best option

10. Assuming no effects on aggregate supply, if the government increases government spending and decreases taxes in an attempt to prevent a possible recession, aggregate demand will shift to the ____, the price level will either remain constant or ____, and the level of real GDP will ____.

Answer

	a.	right; decrease; increase
	b.	right; decrease; decrease
	c.	left; decrease; decrease
	d.	left; increase; increase
	e.	right; increase; increase

11. For a hypothetical economy, the MPS is 0.08 and the MPI is 0.17. If government spending increases by $35 and taxes increase by $35, what will be the net effect on equilibrium income?

Answer

	a.	A decrease of $35
	b.	An increase of $105
	c.	An increase of $35
	d.	A decrease of $105
	e.	A decrease of $15

12.12. The term fiscal policy refers to

Answer

	a.	the adjustment of the GDP for inflation.
	b.	the purchase and sale of U.S. government securities to regulate the money supply.
	c.	the use of government spending and taxation to influence the level of economic growth and inflation.
	d.	the use of fines to penalize unfair business practices.
	e.	a policy action by Congress to overrule unpopular budget cuts by the president.

13. If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things equal, an increase in government spending will

Answer

	a.	raise the price level and leave real GDP unchanged.
	b.	raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged.
	c.	raise both real GDP and the price level by a multiple of the initial spending increase.
	d.	have no effect on real GDP or on the price level, because all private investment will be crowded out.
	e.	lower real GDP by an amount equal to the spending increase and reduce inflation.

14. Which of the following is not a means to finance government spending?

Answer

	a.	Government subsidies
	b.	Government debt
	c.	Capital gains taxes
	d.	Personal income taxes
	e.	Money creation

15. An automatic stabilizer is

Answer

	a.	a change in government spending aimed at achieving a policy goal.
	b.	an element of fiscal policy that automatically changes in value as real GDP changes.
	c.	an element of monetary policy that automatically changes in value as real GDP changes.
	d.	a decrease in tax rates as the economy moves into a recession.
	e.	a deliberate change in taxation aimed at increasing real GDP.

16. Budget deficits tend to grow during recessions because

Answer

	a.	real GDP growth is zero, which causes neither tax receipts nor government expenditures to grow.
	b.	real GDP growth is positive, which reduces both tax receipts and transfer payments.
	c.	real GDP growth is negative, which reduces transfer payments in relation to tax receipts.
	d.	real GDP growth is negative, which reduces tax receipts in relation to government expenditures.
	e.	real GDP growth is positive, which increases tax receipts in relation to government expenditures.

EC 202 Lecture Notes - Lecture 18: Fiscal Policy, Procyclical And Countercyclical

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