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| Question | Answer |
| Fiscal Policy | the use of the federal budget to achieve macroeconomic objectives |
| Why does the government use fiscal policy? | o Income redistribution o Spending |
| Federal Budget | the annual statement of the federal government’s outlays (spending) and taxes revenues |
| Revenues consist of | • Personal income taxes (largest component) • Corporate income taxes • Indirect taxes (GST/HST) • Investment income |
| outlays consist of | • Transfer payments (largest component) • Expenditure on goods and services • Debt interest |
| Budget Balance | Budget balance = revenue – outlays |
| Budget Surplus | revenues > outlays |
| Budget Deficit | outlays > revenues |
| Balanced Budget | revenues = outlays |
| Government Debt | the accumulation of government borrowing |
| Supply-Side Effects | the effect of fiscal policy on employment, potential GDP, and aggregate supply |
| Tax Wedge | the gap created between the before-tax and after-tax wage rates |
| When the quantity of labour employed decreases, potential GDP ______ and the supply-side effect of a rise in the income tax _____ potential GDP and _______ aggregate supply | When the quantity of labour employed decreases, potential GDP decreases and the supply-side effect of a rise in the income tax decreases potential GDP and decreases aggregate supply |
| Tax Wedge Rate Equation | Tax wedge = income tax rate + tax rate of consumption expenditure |
| Real Interest Rate Equation | real interest rate=nominal rate-inflation rate |
| Real After-Tax Rate Equation | real after-tax rate=nominal rate-inflation rate (tax rate*nominal rate) |
| Laffer Curve | the relationship between the tax rate and the amount of tax revenue collected |
| A tax ______ the supply of loanable funds | A tax decreases the supply of loanable funds |
| At the tax rate T* on the Laffer curve, tax revenue is ________ | At the tax rate T* on the Laffer curve, tax revenue is maximized |
| Below T* on the Laffer curve, a rise in the tax rate _______ revenue | Below T* on the Laffer curve, a rise in the tax rate increases revenue |
| For a tax rate above T* on the Laffer curve, a rise in the tax rate _______ tax revenue | For a tax rate above T* on the Laffer curve, a rise in the tax rate decreases tax revenue |
| Discretionary Fiscal Policy | a policy action that is initiated by an act on parliament |
| Automatic Fiscal Policy | a fiscal policy action triggered by the state of the economy with no explicit action by government |
| Structural Surplus or Deficit | the budget balance that would occur if the economy were at full employment and real GDP were equal to potential GDP |
| Cyclical Surplus or Deficit | is the actual surplus or deficit minus the structural surplus or deficit |
| Government Expenditure Multiplier | the magnification effect of a change in government expenditure on goods and services on real GDP |
| Tax Multiplier | quantitative effect of a change in taxes on real GDP |
| if the government finances spending by borrowing, there is _________ | if the government finances spending by borrowing, there is crowding out |
| An increase in government expenditure or a tax cut _______ aggregate demand | An increase in government expenditure or a tax cut increases aggregate demand |
| A decrease in government expenditure or a tax increase _______ aggregate demand | A decrease in government expenditure or a tax increase decreases aggregate demand |
| Removal of stimulus can act like a fiscal restraint and shift aggregate demand to the _______ | Removal of stimulus can act like a fiscal restraint and shift aggregate demand to the left |
| Recognition Lag | the time it takes to figure out that fiscal policy action is needed |
| Law-Making Lag | the time it takes parliament to pass the laws needed to change taxes or spending |
| Impact Lag | the time it takes form passing a tax or spending change to its effect on real GDP being felt |
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