ECO202Y1 Lecture Notes - Income Tax, Potential Output, Aggregate Demand

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23 Apr 2013

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Fiscal policy involves changes in taxes and spending by the government. To achieve: full employment, price stability, long-term economic growth. The annual statement of revenues and expenditures by the government: budget surplus, budget deficit, balance budget. Government expenditure: transfer payments (unemployment checks, expenditures on goods and services, debt interest payment. Deficits: budget deficits add to the gov"t. debt. Debt: the total amount of government borrowing. Tax increases decreases disposable income and decrease aggregate demand. As a result, ad curve shifts out and to the left: contractionary (tight) fiscal policy. Many economists recognize the power of tax cuts as incentives. But tax cuts without spending cuts would increase the budget deficit and cause serious they correctly argues that tax cuts would increase employment and increase output problems. Used as a tool to stabilize the business cycle fiscal policy actions work by changing the aggregate demand. A change in a spending program or a tax law.

Related Questions

You hear on the nightly news that the president has vowed to decrease the nation's debt. Both the government and private citizens will have to buckle down and learn to do without, he says.

In order to reduce its debt, a nation must:

A.	run lower deficits.
B.	decrease tax rates.
C.	run lower surpluses.
D.	increase in government spending.

Debt reduction will result in:

A.	more public works projects, higher transfer payments, and more money available for households to spend.
B.	fewer public works projects, higher transfer payments, and more money available for households to spend.
C.	more public works projects, lower transfer payments, and less money available for households to spend.
D.	fewer public works projects, lower transfer payments, and less money available for households to spend.

A friend of yours looks at the state of the U.S. debt in 2011 and tells you, Since the debt is so high, we must be running an incredibly large deficit every year. Your friend's analysis is:

A.	not valid, because the debt is always changing even when deficits are the same.
B.	not valid, because the debt can be high even when the deficit for an individual year is small.
C.	valid, because the debt is always changing even when deficits are the same.
D.	valid, because the public debt is the sum of all deficits and surpluses run by the government over time and can be high even when the deficit for an individual year is small.

Assume that the government in some nations intended to respond to low employment via fiscal policy.

a. What type of policy would this require?

A.	A contractionary fiscal policy designed to decrease the aggregate demand curve.
B.	An expansionary fiscal policy designed to decrease the aggregate demand curve.
C.	An expansionary fiscal policy designed to increase the aggregate demand curve.
D.	A contractionary fiscal policy designed to increase the aggregate demand curve.

b. Assume that this policy ended up having an undesirable outcome. How could this happen in terms of formulation and implementation lags?

A.	This could happen if the implementation lag exceeded the formulation lag.
B.	This could happen if the formulation lag exceeded the implementation lag.
C.	This could happen if the formulation lag and the implementation lag exceeded the expansion.
D.	This could happen if the formulation lag and the implementation lag exceeded the recession.

Econo Nation started 2008 with no national budget debt or surplus. By the end of 2008, it had a budget surplus of $286 million; in 2009, it had a budget deficit of $-425 million; in 2010, it had a budget surplus of $100 million, and the amount of its budget deficit or surplus in 2011 is unknown. If at the end of 2011 Econo Nation's national debt totalled $52 million, determine the deficit or surplus in 2011.

Instructions: Enter your answer as a whole number and include a negative sign if there is a deficit.

Period	Deficit (-) or surplus (+)
Beginning of 2008	$0
End of 2008	$286 million
2009	$-425 million
2010	$100 million
End of 2011	_______ million

sapphiresalmon584

1. Discretionary fiscal policy refers to:

A. Any change in government spending or taxes that destabilizes the economy.

B. The authority that the President has to change personal income tax rates.

C. Intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

D. The changes in taxes and transfers that occur as GDP changes.

2. Countercyclical discretionary fiscal policy calls for:

A. Surpluses during recessions and deficits during periods of demand-pull inflation.

B. Deficits during recessions and surpluses during periods of demand-pull inflation.

C. Surpluses during both recessions and periods of demand-pull inflation.

D. Deficits during both recessions and periods of demand-pull inflation.

3. Contractionary fiscal policy is so named because of it:

A. Involves a contraction of the nation's money supply.

B. Necessarily reduces the size of government.

C. Is aimed at reducing aggregate demand and thus achieving price stability.

D. Is expressly designed to expand real GDP.

brownsea-lion330

Assume that the equations below describe the expenditures within a particular macroeconomy and that these equations conform to the assumptions we've made in the lecture regarding the fixed price level Aggregate Expenditure model. All values for expenditure and income are dollar amounts, but for simplicity, we've dropped the $ below.

C = 0.8(DI) + 1000	C = Consumption expenditure, DI = Disposable Income
I = 2000	I = Investment expenditure
G = 1000	G = government expenditure
X = 1600	X = spending on exports
M = 1800	M = spending on imports
DI = Y - T	Y = real GDP, T = tax revenues/>
T = 1000
Yp = 12000	Yp = Potential GDP

Given the equations above, we can describe the GDP, government budget, and net exports in this economy. Select three characteristics from the list below which accurately describe this economy. Note that there is no partial credit on this question. I.e., your answer will either be all correct, or all wrong.

	a.	inflationary gap
	b.	recessionary gap
	c.	no output gap
	d.	government budget surplus
	e.	government budget deficit
	f.	balanced government budget
	g.	trade deficit
	h.	trade surplus
	i.	net exports of zero

pucearmadillo585

ECO202Y1 Lecture Notes - Income Tax, Potential Output, Aggregate Demand

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