Unit 4 Study

Fiscal Policy Attempts by the government to exert a stabilizing effect on the economy. This is done by changing the amount of government spending (discretionary) and taxation
Expansionary and Contractionary What are the two types of fiscal policy?
Expansionary Designed to fight recession
Contractionary Designed to fight inflation
Spend Less, Raise Taxes, or both If the problem is inflation give an example of the type of action the gov should take
Demand-pull inflation What kind of inflation is contractionary designed to fix
Expansionary Which fiscal policy results in a deficit?
Borrowing and money creation Two ways the government can finance a deficit
Money Creation Which is the most expansionary
Surplus What is the budgetary effect of an contractionary fiscal policy
Debt Reduction and Impounding Two other ways to deal with a surplus
Impounding Which is more contractionary, debt reduction or impounding?
Expansionary during elections What’s the political business cycle?
Crowding out effect Government borrows money, up interest rate down amount invested
Lag for fiscal policy recognitional operationaladministrative
Recognition lag takes time to realize what the problem is
Administrative lag takes time to vote on legislation
Operational lag takes time for the money to actually get spent
Difference between debt and deficit – the amount government spending exceeds revenue in a year – the accumulation of the Federal Government’s total deficits & surpluses over time
Deficit The amount government spending exceeds revenue in a year
National Debt the accumulation of the Federal Government’s total deficits & surpluses over time
Budgetary philosophies – Balanced budget- Cyclically balanced budget -Functional Finance
Procyclical balanced budget gov spends more when the economy does well & spends less when it isn’t, when it should really be the opposite
Cyclically balanced deficits during recession & surpluses during periods of growth
Functional finance you spend to maintain full employment
Increases the interest rate Why is the Crowding out effect not a determinant to AD?
Causes of debt – Wars – Recessions – Increased spending – Tax cuts without spending cuts- Entitlement spending- welfare & social security
Deficits Has the gov been accumulating surpluses or deficits?
Secondary Effects net exportscrowding out effect
Expansionary Fiscal Policy – Increase government spending- Reduce taxes- Combination of the two
Contractionary Fiscal Policy – Decrease government spending- Raise taxes- Combination of the two
Debt Reduction Pay down the debt
Impounding Don’t spend the extra money
Externality Private costs of behavior being different from the social costs

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