Econ: Chapter 12

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Economics

What happens when G increases

Aggregate demand increases

What is the crowding out effect?

a recession causes the government to borrow from the federal reserve, there is less savings for businesses, new investment gets choked off. government spending reduces private spending

What happens when the government borrows

our savings are absorbed

what is expansionary

AD increases to help fight inflation

what is automatic protection

stabalizes aggregate spending of the business cycle. already built into the system

examples of automatic protection

taxes decrease during recession, credit is still available, unemployment compensation, direct taxes, welfare payments

what is discretionary

ways and means to make automatic stabilizers more effective (public works spending) change in tax rates

What are the fiscal policy time lags

1, recognize, 2. decision 3. impact all takes 6-9 months

what is national debt:

current outstanding federal securities that the treasury issues

what happens when the gdp is too small

we have a recessionary gap

what is the inflationary gap

equilibrium gdp is larger than full employment gdp

what are the fiscal and monetary policy

different means but same goals

when are budget surpluses most appropriate

during inflation

the crowding out effect is

equally strong during a recession and prosperity

what is the biggest decline during a recession

corporate aftertax profits

what do the automatic stabilizers do

smooth out the business cycle

who makes the fiscal policy

the president and congress

what are the requirements to override a presidential veto

two thirds vote in each house of congress

what does the crowding out effect cancel out

expansionary fiscal policy

if equilibrium gdp is at 5.5 trillon and full employment gdp is 5 trillion there is

an inflationary gap

what is the fiscal policy recognition lag

it is always longer than the decision and the impact lag combined

since 2001 what happened with the federal budget deficit

it increasd

since 2001 what happened with the national debt

it decreased

is the national debt larger than the gdp

no

willl the national debt ever get paid off eventually

no

is most of the national debt held by foreigners

no

what happens if the federal government attempts to elliminate a budget deficit during a depression

it will make the depression worse

what do we want during times of inflation

raise taxes and run budget surpluses

is the public debt larger than our gdp

no

is the public debt the sum of our deficits minus our surpluses over the years since the beginning of the country

yes

have we only had budget deficits during recession years and wartimes

no

what was the main feature of 2008 economic stimulus package

taxpayer rebates

what is an advantage to automatic stabilizers

they require no legislative action by congress to be made effective

what is the most valid argument against the size of national debt

leaves future generations less plant, equipment, and housing than would be left had there been a smaller debt

national debt in january 2015

18 trillion

in 2006 and 2007 we had

neither an inflationary or recessionary gap

what happened with the federal budget surplus between 1998 and 2000

it rose

what happened with the publicly held national debt

it fell

what is dynamic scoring closely related to

crowding in effect

what do the automatic stabilizers do

moderate the extreme business cycle

compared toeh federal budget deficit in fiscal year 2008, the 2009 deficit was

4 times its size

why is the federal deficit bad

like national debt, we owe it to ourselves, we have becoming increasingly dependent on foreigners to finance it, it tends to raise interest rates

why is the federal deficit good

the money might otherwise have gone to other government services

the $787 billion stimulus package

had little effect on the federal budget deficit

were the chinese and american stimulus packages equally successful

yes

which recession did we not have a jobless recovery in

2007-2009

What is the fiscal policy?

the manipulation of the federal budget to attain price stability, full employment, satisfactory rate of economic growth

What will bring about full employment at stable prices?

aggregate of good and services equal aggregate demand of goods and services

What does equilibrium GDP tell us?

the level of spending in the economy

what does full employment GDP tell us?

the necessary level of spending to get the unemployment rate down to 5%

What happens when equilibirum GDP is too big?

there's an inflationary gap

what happens when equilibrium GDP is too small?

a recessionary gap

what is equilibrium gdp?

the level of output at which aggregate supply equals aggregate demand. our economy is always at or tending towards equilibrium gdp

what is aggregate demand?

sum of all expenditures for goods and services

what is aggregate supply?

nation's total output of final goods and services

what is full employment

nearly all our resources are being used

what is full employment gdp

level of spending necessary to provide full employment of our resources

what is a recessionary gap

when equilibrium gdp is less than full employment gdp; too small. to the right on graph.

how to eliminate the recessionary gap?

raise government spending or lower taxes

what is an inflationary gap

equilibrium gdp is greater then full employment gdp; too large. to the right of full employment gdp on a graph

how to eliminate an inflationary gap

cut government spending and raise taxes

what happens when spending is too high

gdp is above full employment

what do liberals favor

high spending, high taxing, big government; raise taxes

what do conservatives favor

low spending, low taxing, small government; cut government spending

what does conventional fiscal policy call for in a recession

tax cuts and more government spending

what happens is C goes up/down?

GDP goes up/down along with it

what is the multiplier formula

multiplier=1 divided by 1 minus MPC

MPC+MPS=

1

1-MPC=

MPS

New GDP formula:

initial gdp + (change in spending x multiplier)

multiplier =

distance between equilibrium gdp and full employment gdp divided by the gap

what are the automatic stabilizers

personal income/payroll taxes, personal savings, credit availability, corporate profit tax, and other transfer payments

what happens to tax receipts during recessions:

they decline

what do the automatic stabilizers do:

they protect us from the extremes of the business cycle

what happens to tax receipts during inflations:

they rise

what happens to corporate profits during economic downturns

they fall much more quickly than wages, consumption, or real gdp

what 3 payments do rise automatically:

welfare, medicaid, and food stamps

why are these 3 payments important:

alleviate human suffering, and help provide a flood under spending which keeps downturn from worsening

automatic stabilizers __ out the business cycle but don't __ it

smooth, eliminate

what is the discretionary fiscal policy

making the automatic stabilizers more effective, public works, change in tax rates, changes in government spending

what are the public works

jobs created by Roosevelt such as raking leaves to building government buildings to end the depression

how to we fight recessions

budget deficits

how do we fight inflations

budget surpluses

what is the recognition lag

the president and congress must recognize that there is a problem

decision lag?

they must decide what to do about it

the impact lag?

the time is takes for their action to have an impact

what is a budget deficit

government spending is greater than tax revenue.

how to make up the difference of a budget deficit?

it borrows

which is more common deficits or surpluses?

deficits

what happens when the budget is a surplus

tax revenue is greater than government spending

what is a balanced budget

government expenditures are equal to tax revenue.

have we ever had a balanced budget

no

why are large deficits bad

they raise interest rates and discourage investment

who is the government dependent on to finance the deficit

foreign savers

what does the deficit do to personal savings

sops them up making less savings available to corporate borrowers seeking funds for new plant/equipment

how are deficits and national debt related

deficits are tacked on to national debt. higher the deficit, the more interest we have to pay on national debt

what are the Monetarists debate

deficits cause crowding out

keynesians debate

deficits cause crowding in

what is the national debt

currently outstanding federal securities that the treasury has issued. cumulative total of all the federal budget deficits less any surpluses.

when do we have to pay off the debt?

we don't. we roll it over or refinance it

who holds the national debt?

us government, americans, federal reserve, foreigners

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