-
During a recession, tax revenue
fall and transfer payments rise, causing the economy to contract by less than it would in the absences of automatic stabilizers
-
Activist fiscal policies
usually produce budget deficits
-
According to the Ricardian equivalence theorem, an increase inthe budge deficit as a result of higher gov. spending will cause households to
expect an increase in taxes and therefore save more now
-
According to the concept of crowding out the effect on AD of an increase in gov. spending will be partially offset by
a decrease in investment spending as a result of higher interest rates
-
When the gov. runs a deficit it must
sell bonds to finance the deficit
-
Fiscal policy is
the changing of taxes and gov. spending in order to change aggregate demand and output
-
Unemployment compensation payments to the unemployed
fall during an expansion thereby slowing the expansion
-
Which of the following would a new classical economist most likely suggest if the economy was in a recession
cut taxes
-
Assume that Obama achieves a dramatic increase in gov spending. An economist with a New Classical view would conclude that aggregate demand
does not shift since the higher gov. spending is offset by lower consumption
-
Crowding out occurs when
gov. deficit spending increases interest rates
-
If investment is relatively sensitive to interest rates, an increase in gov. spending that increases interest rates will
not have much of an effect on AD
-
According to the Ricardian equivalence theorem, gov, deficits do not affect output because people
save more when the gov deficits increase
-
According to the nuanced functional finance view expansionary fiscal policy
decreases unemployment but increases interest rates
-
During a recession, automatic stablizers
reduce a budget surplus or increase a deficit
-
Classical economists believe that the government
should not borrow to finance gov spending except during wartime
-
An economist who follows a functional finance principle is most liekly to suggest that when the economy is experiencing inflation the gov should
run a surplus
-
If the gov. increases the amount it borrows due to an increase in gov. spending interest rates will likely
rise
-
Fiscal policy would be more effective in stabilizing the economy if
the gov could change taxes and spending rapidly
-
The view that the gov budget should always be balanced except in wartime is
sound finance
-
If an economy is in a recession and the govenrment increases spending, an economist with a functional finance view would believe that
AD likely wuld shift to the right
-
Ricardian equivalence theorem
theoretical proposition that deficits do not affect the level of output in the economy because individuals increase their savings to account for expected future tax payments to repay the deficit
-
functional finance
theoretical proposition, gov should make spending and taxing decisions on the basis of their effect on the economy, not on the basis of some moralistic principle that budgets should be balanced
-
Multiplier model assumes
- 1. financing the deficit doesn't have any offsetting effects
- 2. gov knows what the situation is
- 3. gov. knows the economy's potential income level - the highest level of income that doesn't cause accelerating inflation
- 4. gov has flexibility in changing spending and taxes
- 5. the size of the gov debt doesn't matter
- 6. fiscal policy doesn't negatively affect other gov. goals
-
automatic stabilizer
gov program or policy that will counteract the bus cycle without any new gov action
-
procyclical fiscal policy
changes in gov spending and taxes that increase the cyclical fluctuations in the economy instead of reducing them
-
new classical macroeconomics
theoretical approach to macroeconomics that revived many prekeynesian theoretical ideas of the macro economy
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