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Economics 101Chapter18

Economics 101Chapter18 - 1 Objectives for Chapter 18 Fiscal...

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Objectives for Chapter 18: Fiscal Policy (This is a technical chapter and may require two class periods.) At the end of Chapter 18, you will be able to answer the following: 1. How is the government purchases multiplier calculated? (Review) How is the taxation multiplier calculated? Why is it lower than the government purchases multiplier? How is the transfers multiplier calculated? 2. Given some gaps and marginal propensities to consume, calculate how much government purchases, taxes, or transfers should be changed. 3. Explain why an equal increase (decrease) in government purchases and net taxes (taxes minus transfers) has an expansionary (contractionary) effect. 4. What is the balanced budget multiplier ? 5. Explain why discretionary fiscal policy has not been very effective in reducing recessions in the United States. 6. What are the “time lags” ? 7. What is meant by "automatic stabilization" ? What are the main automatic stabilizers? 8. What is meant by "official budget deficit" ? by "structural deficit" ? Why is the structural budget deficit a better measure of the intent of fiscal policy? 9. What does it mean that "fiscal policy is expansionary (or contractionary)" ? How does one determine whether fiscal policy is expansionary or contractionary? 10. In what ways might budget deficits be bad for an economy? In what ways might they be good for an economy? 11. What is meant by “crowding-out” ? 12. Explain the relation between the budget deficits and the trade deficits . 13. What is meant by the "national debt" ? What is the difference between "budget deficit" and "national debt"? What is the difference between "gross national debt" and "net national debt" ? 14. What is the difference between a Treasury bill, a Treasury note, and a Treasury bond ? 15. What has been the trend of the national debt in total and in relation to GDP? 16. To whom is the national debt owed? How is the national debt financed? 17. Is it true that the burden of repaying the national debt is being passed on to our children? Why? 18. Is it true that the national debt could bring the nation into bankruptcy? Why? Chapter 18: Fiscal Policy Part I (latest revision June 2006) In 1946, with World War II over and with the Great Depression only recently ended, Congress passed the Employment Act . This act committed the government of the United States to “promote maximum employment, production, and purchasing power”. The President was mandated to issue a report each year explaining how he will achieve these goals (this report is called The Economic Report of the President ). A new agency, the Council of Economic Advisers , was created to advise the President in writing this report. Although “maximum employment” was not defined in the act, the federal 1
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government was for the first time committed to manage the American economy in an attempt to bring about “full employment”. The role of the federal government in the American economy has been very different since the passage of this act. From that time forward, any President who failed to achieve good economic performance would be considered a failed President. “Good economic performance” requires low rates of
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