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Fiscal policy

deliberate changes in gov't spending, taxes, or some combination of both to promote full employment, price level stability, and economic growth

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What does fiscal policy require?

increases in gov't spending decreases in taxes (or both) a budget deficit

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What is the goal of fiscal policy?

To increase aggregate demand and push an economy from a recession

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What are appropriate fiscal policies to decrease aggregate demand to try to slow or stop demand-pull inflation?

Decreases in gov't spending Increases in taxes (or both) A budget surplus

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What causes built-in stability? What do they vary directly with?

Net tax revenues, which vary directly with the level of GDP

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During a recession, the Federal budget automatically moves towards a _____ ______.

stabilizing deficit

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During expansion, the Federal budget automatically moves towards an ____ __________ ______.

anti-inflationary surplus

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True or false: built-in stability fully corrects undesired changes in real GDP.

False...it lessens undesired changes

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What causes actual federal budget deficits to fluctuate?

1. changes in GDP 2. changes in fiscal policy 3. BOTH

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Cyclical deficits

caused by changes in GDP

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A cyclically-adjusted budget _______ cyclical deficits from the budget and therefore measures the deficit or surplus that would occur if the economy operated at its ___ _________ output throughout the year.

removes; full-employment

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What provides meaningful information as to whether the gov'ts fiscal policy is expansionary, neutral, or contractionary?

Changes in the cyclical-budget deficit or surplus

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True or false: changes in the actual budget deficit/surplus do NOT show whether the policy is expansionary, neutral, or contractionary

True...these deficits or surpluses can include cyclical deficits/surpluses

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By ____, the economy had reached its full employment level of output.

2007

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How did the Federal gov't respond to the deep recession of 2007-2009?

implementing highly expansionary fiscal policy

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Due to fiscal policy between 2007-2008, the cyclically adjusted budget deficit increased from ____ in 2007 to ____ in 2008.

-1.2 % to -2.8%

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The cyclically adjusted budget deficit increased from -2.8% in 2008 to ____ in 2009.

-7.3%

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What problems are associated with implementing fiscal policy?

1. timing (administrative lags) 2. potential of misuse of FP for political rather than economical reasons 3. state and local finances tend to be pro-cyclical
4. potential ineffectiveness if households expect future policy reversals 5. possibility of fiscal policy crowding out private investment

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Most economists believe that fiscal policy can ____ move the economy in a _____ direction, but _____ reliably be used to fine-tune the economy to price stability and full employment.

help; desired; cannot

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True or false: fiscal policy is a reliable backup tool for aiding monetary policy in fighting significant recession or inflation.

True

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Public Debt

accumulation of all past Federal gov't deficits and surpluses; consists of treasury bills, notes, bonds, and US savings bonds.

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What was the public debt in 2009?

$11.9 trillion or 37,437 per capita

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The public debt holds ____ of Federal debt.

57%

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The Federal Reserve and agencies hold ____ of public debt.

43%

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Foreigners hold ____ of the Federal debt

29%

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Interest payments as a percentage of GDP were about ____ in 2009.

1.3%

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Why is the concern for large