Fiscal Policy

Study Flashcards Play Quiz

Questions and Answers

Which one of the following best describes fiscal policy?

The federal government's use of taxing and spending to keep the economy stable

What are some of the most important decisions the federal government makes regarding fiscal policy?

How much to spend and how much to tax

What does a federal budget state?

How much money the government expects to get and how much money it can spend in a particular year

How often does the federal government prepare a new budget?

Each fiscal year (12 month period) Signup and view all the answers

Who is responsible for creating the federal budget?

The Office of Management and Budget (OMB) and the President Signup and view all the answers

What happens if the President vetoes the budget bill?

Congress must override the veto with a 2/3 majority Signup and view all the answers

How can government spending impact the output of the economy?

It can increase or decrease the output of the economy Signup and view all the answers

What is the impact of expansionary fiscal policies on the economy?

They increase output and create jobs Signup and view all the answers

What is the impact of contractionary fiscal policies on the economy?

They decrease output and lead to slower GDP growth Signup and view all the answers

How do tax cuts affect consumer and business behavior?

Consumers and businesses spend more/invest Signup and view all the answers

According to classical economics, who regulates the markets?

Markets regulate themselves Signup and view all the answers

What is the main idea behind Keynesian economics?

Government actions can make up for changes in individuals and businesses Signup and view all the answers

What is the multiplier effect in fiscal policy?

Every dollar in fiscal policy creates a greater than one dollar change in economic activity Signup and view all the answers

What is an automatic stabilizer in fiscal policy?

A government tax or spending category that changes in response to changes in GDP or income Signup and view all the answers

What does supply side economics believe about taxes?

Taxes have a negative influence on output Signup and view all the answers

What is a budget surplus?

When revenues exceed spending Signup and view all the answers

How can the government pay for deficits?

Both creating and borrowing money Signup and view all the answers

What is the national debt?

The total amount of money the federal government owes Signup and view all the answers

What is the crowding-out effect?

When money is spent on bonds, it cannot be used for business investment Signup and view all the answers

What do Keynesian economists argue about high debt?

High debt is beneficial for the economy Signup and view all the answers

Study Notes

Fiscal Policy

Fiscal policy refers to the use of government spending and taxation to influence the overall level of economic activity.

Federal Budget

A federal budget states the government's planned expenditures and revenues for a fiscal year.
The federal government prepares a new budget annually.
The President is responsible for creating the federal budget.

Budget Process

If the President vetoes the budget bill, Congress can try to override the veto with a two-thirds majority vote in both the House and Senate.

Government Spending and Economy

Government spending can impact the output of the economy by increasing aggregate demand, boosting economic growth, and reducing unemployment.
Expansionary fiscal policies (increased government spending or tax cuts) can stimulate economic growth, reduce unemployment, and increase inflation.
Contractionary fiscal policies (decreased government spending or tax increases) can reduce inflation, reduce economic growth, and increase unemployment.

Economic Theories

According to classical economics, markets regulate themselves, and government intervention is not necessary.
The main idea behind Keynesian economics is that government intervention is necessary to stabilize the economy during times of economic downturn.
The multiplier effect in fiscal policy refers to the increased economic activity resulting from government spending or tax cuts.

Automatic Stabilizers

Automatic stabilizers are government programs that automatically increase spending or reduce taxes during economic downturns, such as unemployment benefits and tax refunds.

Supply-Side Economics

Supply-side economics believes that lower tax rates can increase economic growth and stimulate economic activity.

Budget Deficits and Debt

A budget surplus occurs when the government's revenues exceed its expenditures.
The government can pay for deficits by borrowing money, printing more money, or increasing taxes.
The national debt refers to the total accumulated debt of the government.
The crowding-out effect occurs when government borrowing increases interest rates, making it more expensive for businesses and individuals to borrow money.
Keynesian economists argue that high debt can lead to economic instability and higher interest rates.