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Econ: Chapter 12
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
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
since 2001 what happened with the national debt
is the national debt larger than the gdp
willl the national debt ever get paid off eventually
is most of the national debt held by foreigners
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
is the public debt the sum of our deficits minus our surpluses over the years since the beginning of the country
have we only had budget deficits during recession years and wartimes
what was the main feature of 2008 economic stimulus package
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
in 2006 and 2007 we had
neither an inflationary or recessionary gap
what happened with the federal budget surplus between 1998 and 2000
what happened with the publicly held national debt
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
which recession did we not have a jobless recovery in
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
New GDP formula:
initial gdp + (change in spending x 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:
what do the automatic stabilizers do:
they protect us from the extremes of the business cycle
what happens to tax receipts during inflations:
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
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
how do we fight inflations
what is the recognition lag
the president and congress must recognize that there is a problem
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?
which is more common deficits or surpluses?
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
why are large deficits bad
they raise interest rates and discourage investment
who is the government dependent on to finance the deficit
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
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