Exam 13: Fiscal Policy

If the federal government's expenditures are less than its tax revenues, then:

During which decade was government expenditure in Australia the highest as a proportion of GDP?

A deliberate policy change in taxes and government spending to influence the level of aggregate demand is called:

Outline the differences between the government 'purchases multiplier' and the 'tax multiplier'. _____________________________________________________________________________________________ _____________________________________________________________________________________________

If policy makers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to:

The government 'purchases multiplier' always has a positive sign and the 'tax multiplier' always has a negative sign.

Suppose that the nominal wage, the expected and actual price levels, and the expected and actual inflation rates for a hypothetical economy in 2016 are presented in the following table. Given the data, the economy is at an unemployment rate:

Refer to Figure 13.4 for the following questions. Figure 13.4 -Given that the economy has moved from A to B in Figure 13.4, which of the following would be the appropriate fiscal policy to achieve potential GDP?

Identify each of the following as (i)part of an expansionary fiscal policy; (ii)part of a contractionary fiscal policy; or (iii)not part of fiscal policy. a.The personal income tax rate is lowered. b.The government increases spending on defence due to a change in spending priorities. c.The company income tax rate is lowered. d.The State of New South Wales builds a new tollway in an attempt to expand employment and ease traffic congestion. _____________________________________________________________________________________________ _____________________________________________________________________________________________

If increasing government spending also increases the price level, we would expect the level of interest rates to ________ and investment to ________.

Show the impact of tax reduction and simplification using the dynamic aggregate demand and aggregate supply model. Clearly show and identify the impact of the tax change. Show what happens to the price level and real GDP because of the tax change. _____________________________________________________________________________________________ _____________________________________________________________________________________________

How can tax simplification be beneficial to the economy? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Fiscal policy is quicker to implement than monetary policy, as with fiscal policy, changes can be done immediately by the government, whereas with monetary policy, it takes time to change interest rates in financial markets.

Suppose that the government allocates $2 billion for new roads. It also raises taxes by $2 billion to keep the deficit from growing. If the marginal propensity to consume = 0.8, what is the effect on equilibrium GDP?

Milton Friedman argued that there is a ________ trade-off between unemployment and inflation and this trade-off comes from ________ inflation.

Induced taxes and transfer payments reduce the multiplier effects.

The 'multiplier effect' is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures.

Refer to Figure 13.1 for the following questions. Figure 13.1 -In Figure 13.1, if fiscal policy successfully moves the economy from point B to equilibrium at potential GDP, this will:

A vertical long-run Phillips curve implies that in the long-run there is no trade-off between unemployment and inflation.

Explain why 'crowding out' might still occur even if the increase in government spending is funded by borrowing on global financial markets. _____________________________________________________________________________________________ _____________________________________________________________________________________________