Exam 13: Fiscal Policy in the Short Run

Assume the economy is initially in equilibrium with real GDP equal to potential GDP.Other things equal,if the economy enters a recession and there are no automatic stabilizers,the IS curve would shift to the ________,and the shift would be equal to ________.

The gross federal debt refers to

Explain the differences between a federal budget deficit,a federal budget surplus,and the federal government debt.

Suppose you are paid a wage of $50 per hour.If your marginal income tax rate is 20%,then for every additional hour you work,your after-tax wage is

Figure 13.3 Panel (a) Panel (b) -Refer to Figure 13.3.If exchange rates are floating,an expansionary fiscal policy and the typical central bank response to the change in inflation caused by the fiscal policy would best be represented by a movement from ________ in panel (a)and a corresponding movement from ________ in panel (b).

The goal of fiscal policy is to ________,and typically focuses on ________.

There is no guarantee that after a tax cut households will immediately use their extra disposable income to consume more goods and services; they may maintain old spending patterns and change their spending slowly over time.As a result,the ________ for fiscal policy can last from several months to several years.

Changes in taxes,transfer payments,or government expenditures that naturally occur with the business cycle are known as

Holding all else constant,an increase in consumption taxes,such as sales taxes or a VAT,will ________ the price of consumption goods and ________ output.

If the economy is in a recession,the inflation rate is ________ it would be at potential GDP.Other things equal,if the government implemented an expansionary fiscal policy,the inflation rate would ________.

For each of the following situations,choose a fiscal policy and explain how it could be used to correct the economic problem. a. Real GDP is below potential GDP following a financial market crisis. b. A positive demand shock increases aggregate expenditure beyond the full employment level and leads to fears of rising inflation. c. The economy is in a recession due to rising defaults on mortgages following the bursting of a housing bubble.

Briefly explain the effects on potential GDP of cutting each of the following taxes: a. Individual income tax b. Corporate income tax c. Taxes on dividends and capital gains

The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy were

If income taxes are incorporated into the discussion of the expenditure multiplier,the expenditure multiplier becomes

Historically,the largest Canadian federal budget deficits as a percentage of GDP in the last 50 years occurred between

If the MPC is 0.75 and the tax rate is 10%,the expenditure multiplier will equal

Expenditure and tax multipliers are likely to be large