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Econ Ch 13

The government’s fiscal policy options for ending severe demand-pull inflation include
reducing government spending, increasing taxes, or both.
For a person who wants to preserve the size of government, the fiscal options for ending severe demand-pull inflation would include
an increase in taxes.
For a person who thinks the public sector is too large, the fiscal options for ending severe demand-pull inflation would include
a cut in government spending.
The ratchet effect makes anti-inflationary policy
more difficult
Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession.
Net tax revenue falls and transfer payments rise. Balancing the budget would require lowering transfer payments and raising taxes
Built-in, or automatic, stabilizers work by changing ______ so that GDP changes are reduced.
taxes and government payouts
What type of tax system would have the most built-in stability?
A progressive tax because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes.
The standardized budget measures what the Federal deficit or surplus would be if the economy reached the _______ level of GDP.
If the standardized budget is balanced, the
government is not engaging in either expansionary or contractionary policy
A political business cycle is the concept that
politicians are more interested in reelection than in stabilizing the economy
Expectations of a near-term policy reversal weaken fiscal policy because
consumers may hesitate to increase their spending because they believe that tax rates will rise again.
The crowding-out effect is the
reduction in investment spending caused by the increase in interest rates, arising from an increase in government spending.
Consider the following statement: “Although fiscal policy clearly is useful in combating the extremes of severe recession and demand-pull inflation, it is impossible to use fiscal policy to fine-tune the economy to the full-employment, noninflationary level of real GDP and keep the economy there indefinitely.”

This statement recognizes that

the impact of fiscal policy will affect the economy differently depending on the timing of the policy and the severity of the situation
What are the two ways to measure the public debt?
Its absolute dollar size and as a percentage of GDP
The distinction between the absolute and relative sizes of the public debt is important because
the absolute size doesn’t tell you about an economy’s capacity to repay the debt
Refinancing the public debt means
selling new bonds to retire maturing bonds.
An internally held debt is one in which the
bondholders live in the nation having the debt
Paying off an internally held debt would
not burden the economy as a whole
Paying off an externally held debt
may lower the dollar exchange rate.
The total public debt is more relevant to an economy than the public debt as a percentage of GDP
An internally held public debt is like a debt of the left hand owed to the right hand
The Federal Reserve and Federal government agencies hold more than three-fourths of the public debt
The portion of the U.S. debt held by the public (and not by government entities) was larger as a percentage of GDP in 2009 than it was in 2000
As a percentage of GDP, the total U.S. public debt is the highest such debt among the world’s advanced industrial nations
Refinancing of the public debt might drive up real interest rates because
government borrowing to finance the debt increases demand for funds and competes with private borrowing
Refinancing of the public debt might cause
higher interest rates that can lower investment and economic growth.
Social Security and Medicare are “pay-as-you-go” plans. This means that
most of the current revenues from the Social Security tax are paid to current Social Security retirees
Social Security and Medicare trust funds are
assets held by these programs to help pay for future projected tax revenue shortfalls

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