Untitled Flashcards Set

What is Expansionary Fiscal Policy?

Uses discretionary government spending or taxes to stabilize the economy.

What percentage of the federal budget does Mandatory Spending account for?

63% of the federal budget.

What type of government spending requires annual review?

Discretionary Spending.

How does Expansionary Fiscal Policy impact Aggregate Demand?

It increases spending or reduces taxes to correct recessionary gaps.

What is a key example of how government spending can impact Aggregate Demand?

Government spending rises can move aggregate demand from AD1 to AD2.

What is the Tax Cut needed to match a $5 billion spending increase if MPC is 0.75?

A tax cut of $6.67 billion.

What can lead to a budget deficit?

Spending exceeding tax revenues.

How is a budget deficit financed?

Through government securities that increase national debt.

What is the purpose of Contractionary Fiscal Policy?

Reduces inflationary gaps when aggregate demand rises.

What mechanisms are involved in Contractionary Fiscal Policy?

Tax increases and reduced government spending.

What effect must be considered when implementing Contractionary Fiscal Policy?

The ratchet effect; prices may not return to previous levels.

If MPC is 0.75, how much must taxes increase to reduce consumption by $3 billion?

Taxes must increase by $4 billion.

What can the multiplier effect lead to in GDP reduction during Contractionary Fiscal Policy?

A total reduction of $12 billion in GDP.

What is a Budget Surplus?

A situation where tax revenues exceed spending.

How can a Budget Surplus affect national debt?

It can reduce national debt.

What do Conservatives prefer in terms of government role during economic changes?

Smaller government role and favor tax cuts in recessions.

What do Liberals advocate for during economic changes?

A larger government role, supporting spending increases in recessions.

What are Automatic Stabilizers?

Programs that automatically adjust spending/taxes during economic instability.

How do Transfer Payments function during recessions?

They increase as unemployment rises.

What impact do Progressive Income Taxes have during economic growth?

Higher earners pay a larger percentage, benefiting tax revenue.

What happens to balanced budgets during recessions?

They tend to go into deficit.

What happens to balanced budgets during economic growth?

They tend to go into surplus.

Why are Automatic Stabilizers often insufficient?

They are not sufficient to manage significant demand swings, necessitating active government intervention.

What is discretionary spending?

Government expenditures that require annual review.

What is the potential consequence of rising government spending?

Moving Aggregate Demand, which could lead to recession correction.

What happens to tax revenues during economic growth due to progressive taxes?

Tax revenues increase as higher earners pay more.

What is one effect of a rising national debt due to budget deficits?

Increased financial burden on future generations.

What is one of the key principles of Liberals regarding fiscal policy?

Support for spending increases in economic recessions.

What is the main goal of using tax cuts in Expansionary Fiscal Policy?

To stimulate aggregate demand and economic growth.

What is a significant risk of Contractionary Fiscal Policy when aggregate demand is reduced?

Potentially leading to higher unemployment.

In what situation might the government implement Automatic Stabilizers?

During periods of economic instability.

What is one example of a mandatory spending program?

Social Security.

What economic scenario might trigger the use of Contractionary Fiscal Policy?

When inflationary gaps occur during economic expansion.

What is a key characteristic of Mandatory Spending?

It is automatic and written into law.

What is one potential outcome of increased government spending during a recession?

It can help decrease the recessionary gap.

What fiscal policy approach do conservatives typically emphasize during inflation?

Spending cuts.

During economic downturns, how do Automatic Stabilizers operate?

They automatically increase to support individuals and stimulate the economy.