Economics - Semester 1 FINAL

What is fiscal policy?

The ability of the government to afford GDP and employment through the way it spends, taxes, and borrows

What falls into the realm of fiscal policy?

Pump Priming

Who is John Keynes? Why is he significant?

British economist who developed the concept of fiscal policy

What are the three ways the government can affect output (GDP/income) and employment?

Spending, taxing, borrowing

List the problems with Taxes as a tool of fiscal policy.

Confusion in the marketplace + Effect on National work ethic

List the problems with governmental borrowing

No reserve bucket of idle money

Risk of being addictive

Destroys a nation’s future productivity

List the problems with government spending

• Timelags - procrastination leads to a conclusion coming too late

• Uncertain multiplier - its impossible to guess the exact MPC/MPS due to inconsistent spending habits of the nation

• Source of Spending - where will we pull funds from to spend with?

• Politics - decisions are driven by political interests rather than public welfare

What are the different types of taxes? List Examples of each

1. Proportional - sales tax

2. Progressive - individual income tax

3. Regressive - gasoline tax

What do FICA taxes contribute to?

Social Security

What is the laffer curve?

Graph that shows that increase of tax rate doesn’t equal increase in revenue

What is the Marginal Propensity to Consume?

Portion of each dollar that one spends

What is the Marginal Propensity to Save?

Portion of each dollar that one saves

What is the expenditure multiplier?

• shows how an initial change in spending effects GDP

• used to calculate additional change in GDP based on gov. spending

• used to calculate how much more spending is required to achieve a certain GDP

What do Keynesian economists believe we ought to do in periods of economic decline?

Increase spending and Decrease taxes

What do Keynesian economists believe we ought to do in periods of economic expansion? Why?

Decrease spending by Increasing taxes

(prevents a large crash caused by the economy growing too fast)

Why does growth on interest bother economists?

• Interest does not equal reduced debt

• As Interest increases and is paid off, there are no gains

How do you calculate the MPC?

Amount Spent / Amount Received

How do you calculate the MPS?

1 - MPC

How do you calculate the expenditure multiplier?

1 / (1 - MPC)

If we want to determine a change in national income what formula would we use?

Total Change in GDP = Amount Initially Received x 1/(1-MPC)