Survey of Economics – Chapter 18: Fiscal Policy

A set of question-and-answer flashcards covering definitions, classifications, trends, and examples related to U.S. fiscal policy and automatic stabilizers from Chapter 18 lecture notes.

What is fiscal policy?

It is the use of changes in government spending and taxes to achieve macroeconomic objectives such as full employment, stable prices, and economic growth.

Who is responsible for conducting U.S. fiscal policy?

The federal government—specifically Congress and the President—sets fiscal policy.

What are automatic stabilizers?

Government spending and tax mechanisms that automatically rise or fall with the business cycle, moderating economic fluctuations without new legislation.

Give two prominent examples of automatic stabilizers in the United States.

Unemployment-insurance payments and the progressive (graduated) federal income‐tax system.

How do automatic stabilizers lessen the severity of a recession?

During recessions, unemployment benefits increase and tax revenues decline, raising household disposable income and helping sustain aggregate demand.

Distinguish between federal purchases and federal expenditures.

Federal purchases require the government to receive a good or service in return; federal expenditures include those purchases plus transfer payments and other outlays.

Since 1960, what has happened to federal purchases as a percentage of GDP?

They have decreased as a share of GDP.

Since 1960, what has happened to total federal expenditures as a percentage of GDP?

They have increased as a share of GDP.

Was the 2009 “Cash for Clunkers” program an example of fiscal policy? Why or why not?

Yes. The program used government spending to stimulate aggregate demand in the national economy.

Classify: The federal government increases spending to rebuild the New Jersey shore after a hurricane.

Discretionary fiscal policy.

Classify: The Federal Reserve sells Treasury securities.

Not fiscal policy (it is a monetary-policy action).

Classify: Total unemployment‐insurance payouts fall during an expansion.

Automatic stabilizer.

Classify: Individual income-tax revenue falls during a recession.

Automatic stabilizer.

Classify: The federal government raises required gasoline mileage for new cars.

Not fiscal policy (a regulatory, not taxing-or-spending, action).

Classify: Congress and the President enact a temporary payroll-tax cut.

Discretionary fiscal policy.

If personal-income-tax collections fall from one year to the next, does that prove tax rates were cut?

No. Collections may drop because taxable income fell during an economic contraction even if tax rates stayed the same.

During an expansion, what effect do automatic stabilizers have on transfer payments and tax revenues?

Transfer payments decrease while tax revenues increase.

Since World War II, what share of total U.S. government expenditures has been federal?

Roughly one-third to two-thirds of all government spending.

How have total government expenditures and purchases trended since the 1950s? Why?

Expenditures have risen while purchases have fallen (as shares of GDP) mainly because transfer payments such as Social Security and unemployment insurance have grown rapidly.

In economic terminology, fiscal policy refers to changes in taxing and spending by which level of government?

Primarily the federal government.

What name is given to tax and spending changes that occur automatically without new government actions?

Automatic stabilizers.

Cutting taxes deliberately to raise aggregate demand is called what type of policy?

A discretionary fiscal policy.

What three major categories make up federal government expenditures?

Transfer payments, interest on the national debt, and grants to state and local governments.

Which category is the largest and fastest-growing component of federal expenditures?

Transfer payments.

Approximately what share of federal spending goes to day-to-day operation of agencies such as the EPA, FBI, and National Park Service?

Less than 10 percent of total federal expenditures.