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Study Guide for Test 3 of "Prinicples of Macroeconomics" class with Peter Simon

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ECON 1115
Peter Simon

Chapter 13 Fiscal Policy, Deficit, and Debt 1. Fiscal Policy: Government deliberate changes in government spending and tax collections which are aim to achieve full employment, control inflation, and encourage economic growth. • Government spending(discretionary): government spends money on build public project, they are transportation, communication, education • Tax Collection: increase or decrease tax rate Change in government spending will have more infrastructures, but if choose to change in tax, economy will ends up with more consumer goods with no potential to growth for the economy. 2. Two multiplier: according to government spending and tax collection • Government spending:∆y=∆G*k • Tax multiplier:∆y= -mpc*∆T*k For the same amount initial change, the tax multiplier is a bit smaller than the government spending multiplier, since, in the tax equation, change in tax has to times the mpc which makes the total number smaller. In other words, change in Tax has to be greater than change in government spending, so that to get the economy back to the full employment. 3. Automatic Stabilizer (smooth out the business cycle): also known as a build-in stabilizer is anything that increases the government’s budget deficit in recession or increases its budget surplus during an expansion without requiring explicit action by policymakers. (☺Fiscal policy is that government/policymakers deliberate change in G and/or T so that economy will back to the full employment; this is the difference between automatic Stabilizer and Fiscal Policy) • Tax System: progressive tax system, regressive tax system. Works better in inflation than in recession because in recession some people do not work at all • Government programs: social security, unemployed benefit, welfare system, Medicaid, Medicare. Helps better in recession than in inflation. 4. Deficits and National Debt: • Deficits: yearly difference between Tax Revenue and Government Spending. 2013 deficit is 680 Billion; 2014 deficit is 744 Billion • National Debt: 17.5T(or about 17T) which is the accumulation of all past Federal deficits and surplus. 5. For the first part of National Debt you can find it on the Blackboard under “course material” then “ course document” 6. National Debt Part 2: • Third belief (about national debt): the large U.S. debt does not threaten to bankrupt the Federal government, leaving it unable to meet its financial obligations, because two reasons:
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