Notes

What is expansionary fiscal policy?

The use of discretionary government spending or taxes to stabilize the economy.

What are mandatory spending and discretionary spending?

Mandatory spending is automatic spending written into law, while discretionary spending requires annual review.

What effect does a decline in aggregate demand have on the economy?

It leads to reduced output and increased cyclical unemployment.

How does expansionary fiscal policy correct a recessionary gap?

By increasing government spending and reducing taxes.

What factors determine the impact of tax cuts versus government spending?

The marginal propensity to consume (MPC) and the multiplier.

If the MPC is 0.75, MPS is 0.25, and the multiplier is 4, how much spending is needed to close a $20 billion gap?

A $5 billion increase in spending is needed to close a $20 billion gap.

How much tax cut is necessary to achieve the same result as a $5 billion increase in spending?

A $6.67 billion tax cut is required to yield $20 billion.

What does a balanced budget signify?

It indicates that government spending equals revenue.

What is the result of expansionary fiscal measures like tax cuts or increased spending?

They create a budget deficit.

How does the government finance a budget deficit?

By borrowing via securities such as bonds and T-bills.

What contributes to the national debt?

A budget deficit contributes to the national debt, which is the cumulative amount borrowed by the government.

What is the purpose of fiscal policy?

The purpose of fiscal policy is to influence the economy through government spending and taxation.

What is discretionary spending?

Discretionary spending is the portion of the budget that the government sets each year through the appropriations process.

What is a recessionary gap?

A recessionary gap occurs when the economy is operating below its potential output.

What role does the MPC play in fiscal policy?

The marginal propensity to consume (MPC) determines how much of any income increase will be spent.

What is a budget surplus?

A budget surplus occurs when government revenues exceed expenditures.

How does cutting taxes affect aggregate demand?

Cutting taxes increases consumers’ disposable income, leading to higher aggregate demand.

What is the role of automatic stabilizers in fiscal policy?

Automatic stabilizers are economic policies and programs that automatically help stabilize the economy.

How does increased spending influence employment?

Increased government spending creates jobs by boosting demand for goods and services.

What happens to inflation during expansionary fiscal policy?

Inflation may increase as more money circulates in the economy due to higher demand.

What is the relationship between the national debt and fiscal policy?

Fiscal policy decisions, particularly budget deficits, contribute to the accumulation of national debt.

What is the primary goal of expansionary fiscal policy?

To stimulate economic growth during a recession by increasing government spending or cutting taxes.

What is the difference between cyclical and structural unemployment?

Cyclical unemployment is caused by economic downturns, while structural unemployment arises from mismatches between workers' skills and job requirements.

What are the potential downsides of expansionary fiscal policy?

It can lead to budget deficits and increased national debt.

How do tax cuts typically influence consumer behavior?

They increase disposable income, encouraging consumers to spend more.

What is the significance of the multiplier effect in fiscal policy?

It demonstrates how an initial increase in spending leads to a larger overall increase in economic activity.

What is the role of the Federal Reserve during economic downturns?

To implement monetary policy that can complement fiscal policy, such as lowering interest rates.

What is a liquidity trap?

A situation where interest rates are low and savings rates are high, making monetary policy ineffective.

What can happen if expansionary fiscal policy is maintained too long?

It may lead to inflation if the economy overheats.

How does government borrowing affect interest rates?

Increased government borrowing can lead to higher interest rates due to higher demand for funds.

What is the difference between automatic stabilizers and discretionary policy?

Automatic stabilizers are built-in features of the economy that activate without new government action, while discretionary policy requires active decisions.