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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 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
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
what happens if the federal government attempts to elliminate a budget deficit during a depression
it will make the depression worse
is the public debt the sum of our deficits minus our surpluses over the years since the beginning of the country
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
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
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 full employment GDP tell us?
the necessary level of spending to get the unemployment rate down to 5%
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 a recessionary gap
when equilibrium gdp is less than full employment gdp; too small. to the right on graph.
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
what are the automatic stabilizers
personal income/payroll taxes, personal savings, credit availability, corporate profit tax, and other transfer payments
what happens to corporate profits during economic downturns
they fall much more quickly than wages, consumption, or real gdp
why are these 3 payments important:
alleviate human suffering, and help provide a flood under spending which keeps downturn from worsening
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
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 is the national debt
currently outstanding federal securities that the treasury has issued. cumulative total of all the federal budget deficits less any surpluses.
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