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The primary tool of fiscal policy is
the federal budget
when the federal government is running a budget deficit what happens with government expenditures and revenues?
the government expenditures must exceed government revenues
changes in government spending and/or taxes as the result of legislation is called
discretional fiscal policy
what is the political incentive to spend and/or to tax
politicians are rewarded for providing programs that benefit their constituents and punished for raising taxes
what is the difference between the federal budget deficit and the national debt?
the budget deficit is the amount by which expenditures exceed revenues in a particular year, while all the national debt is the cumulative effect of all past budget deficits and surpluses
the privately held government debt is that portion of the national debt that
is owed to domestic and foreign investors
when government debt is financed internationally, future generations will
inherit both higher taxes and additional interest income
deficit spending and a large debt can have important effects on future generations because they
make it possible for those living in the present to pass the opportunity costs of current government spending on to future generations
what is the political attractiveness of debt financing relative to taxation ?
debt financing pushes the visible cost of government into the future
prior to the time of john maynard keynes, most economist stressed that
market adjustments would automatically direct an economy to full employment within a relatively brief period of time
according to the keynesian view, the prolonged unemployment of the great depression resulted because of?
the total expenditures on goods and services were less than the full-employment rate of output
according to Keynes, wages and prices are highly__
inflexible
in the keynesian view, equilibrium takes place when
the level of total spending in the economy is equal to current output
the concept that an increase in total income will expand by a multiple of the initial increase is
the multiplier principle
t/f: the multiplier process always brings previously idle workers into the labor force
false
the government is pursuing an expansionary fiscal policy if it
increases government spending and/or reduces taxes
if the economy is experiences less than full employment, the Keynesian model recommends that the government
undertake expansionary fiscal policy to stimulate AD
according to the Keynesian model, what policy would be most appropriate during a period of rapid inflation?
a budget surplus
what is the policy designed to counter or offset fluctuations in AD
countercyclical policy
what is recognition lag
it takes time to identify an economic problem, such as recession/inflation
decision lag
once the issue is recognized, policymakers must debate and agree on a course of action, which can take months.
implementation lag
even after decisions are made, it takes time for government spending programs or tax change to be put into effect.
impact lag
: the effects of fiscal policy take time to influence AD, as people adjust their spending and businesses respond.
what are features of existing policies that automatically stead the economy by decreasing government spending or increasing taxes during a boom, or by increasing government spending and decreasing taxes during a recession
automatic stabilizers
what is the idea that when households simultaneously try to increase their saving, actual saving may fail to increase because the reduction in consumption and AD will reduce income and employment
the paradox of thrift
the crowding out effect suggests that ?
budget deficits that lead to higher interest rates reduce private investment spending
money is used as a unit of account what does this mean?
money is used to measure the exchange value and costs of goods, services, assets, and resources
money that has neither intrinsic value nor the backing of a commodity with intrinsic value is?
fiat money
are funds available on a credit card included in a definition of the money supply?
no, because these funds are not a store of value
in the U.S., the money supply (M1) consists of..
coins, paper currency, demand deposits, other checkable deposits, and traveler’s checks
an institution that regulates the banking system and controls the money supply
central bank and federal reserve
t/f: the lower % of reserves requires, the larger the potential expansion in the money supply generated by creation of new reserves
true
a federally chartered corporation that insures the deposits held by commercial banks, savings, and loans, and credit unions
federal deposit insurance corporation (FDIC)
members of the federal reserve board of governors are appointed by who?
by the president to staggered 14 year terms
the interest rate that banks pay on loans from the FED is
the discount rate
what does the demand curve for money show?
the amount of money that households and businesses wish to hold at various rates of interest
t/f: when the fed raises the interest rate it pays on reserves, banks are encouraged to hold more reserves and lend less
true
if the FED wanted to institute a more expansionary monetary policy, what would it need to do?
buy government bonds from the public
if the FED wanted to institute a more contractionary monetary policy what would they need to do?
raise the discount rate
what does a decrease in the money supply do ?
…
