Economics Chapter 13 Flashcards

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Questions and Answers

Fiscal policy is carried out primarily by:

state and local governments working together

state governments alone

the Federal government (correct)

local governments alone

Discretionary fiscal policy refers to:

any change in government spending or taxes that destabilizes the economy

the authority that the President has to change personal income tax rates

changes in taxes and government expenditures made by Congress to stabilize the economy (correct)

the changes in taxes and transfers that occur as GDP changes

Countercyclical discretionary fiscal policy calls for:

surpluses during recessions and deficits during periods of demand-pull inflation

surpluses during both recessions and periods of demand-pull inflation

deficits during recessions and surpluses during periods of demand-pull inflation (correct)

deficits during both recessions and periods of demand-pull inflation

Fiscal policy refers to the:

manipulation of government spending and taxes to stabilize domestic output, employment, and the price level Signup and view all the answers

Discretionary fiscal policy is so named because it:

involves specific changes in T and G undertaken expressly for stabilization at the option of Congress Signup and view all the answers

Expansionary fiscal policy is so named because it:

is designed to expand real GDP Signup and view all the answers

Contractionary fiscal policy is so named because it:

is aimed at reducing aggregate demand and thus achieving price stability Signup and view all the answers

An economist who favors smaller government would recommend:

tax cuts during recession and reductions in government spending during inflation Signup and view all the answers

If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by:

increasing government spending by $4 billion Signup and view all the answers

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by:

decreasing taxes by $25 billion Signup and view all the answers

An economist who favored expanded government would recommend:

increases in government spending during recession and tax increases during inflation Signup and view all the answers

If the MPS in an economy is 0.4, government could shift the aggregate demand curve leftward by $50 billion by:

reducing government expenditures by $20 billion Signup and view all the answers

If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by:

increasing taxes by $20 billion Signup and view all the answers

Discretionary fiscal policy will stabilize the economy most when:

deficits are incurred during recessions and surpluses during inflations Signup and view all the answers

Study Notes

Fiscal Policy Overview

Fiscal policy is executed mainly by the Federal government.
It involves government spending and taxation to stabilize the economy, enhance output, and maintain employment levels while controlling price levels.

Discretionary Fiscal Policy

Discretionary fiscal policy involves intentional changes in government spending or taxes aimed at stabilizing the economy, enacted by Congress.
It differs from automatic stabilizers which operate without additional legislative action.

Countercyclical Fiscal Policy

This policy advocates for deficits during economic downturns (recessions) and surpluses during periods of high demand (inflation).

Expansionary and Contractionary Fiscal Policy

Expansionary fiscal policy aims to boost real GDP, often through increased government spending.
Contractionary fiscal policy seeks to reduce aggregate demand, stabilizing prices by cutting government spending or increasing taxes.

Economic Recommendations

Economists favoring smaller government advocate for tax cuts during recessions while decreasing government spending during inflation.
Conversely, those supporting a larger government recommend increasing spending during recessions and raising taxes during inflation.

Aggregate Demand and Fiscal Shifts

If the Marginal Propensity to Save (MPS) is 0.1, a $4 billion increase in government spending could shift aggregate demand by $40 billion.
If the MPS is 0.4, reducing government expenditures by $20 billion can lead to a leftward shift in aggregate demand of $50 billion.
If Marginal Propensity to Consume (MPC) is 0.8, a $25 billion increase in government spending can position aggregate demand $100 billion higher.

Stabilization Effectiveness

Fiscal policies are most effective in stabilizing the economy when deficits occur during recessions and surpluses are realized during inflationary periods.

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Test your knowledge on fiscal policy with these Chapter 13 flashcards. Each card presents a question to enhance your understanding of government spending and taxation principles. Perfect for students who want to reinforce their learning.