Unit 3.3 Chapter 12 Questions 7 + 10 Date: May 10(?)

7.
The full employment budget is a form of measure of the Federal budget surplus or deficit that would occur if the economy operated at full employment. The full employment budget is used to adjust the actual federal budget surpluses and deficits to eliminate the automatic changes in tax revenues.

If the full employment budget is at GDP 3 instead of GDP 2 and then there is a decrease downwards then it is undergoing a deficit and we can assume that the fiscal policy is expansionary. The decrease in the full employment budget indicates that the government has either increased its government spending or decreased its taxes.

10. The problems with the time lags in enacting and applying fiscal policy is that the recession or inflation may have time to grow more serious than it would have been if it were perhaps recognized and acted upon sooner. Recognition lag is a main part of this problem because of the time it takes to recognize a problem, but also Administrative and operational lag contribute to the problem by not acting quickly enough and then for the solution needing time to take effect. A political buisness cycle is when a politician changes the fiscal policy in order to gain popularity or public support, usually by cutting taxes. Politicians dont always have the economy in mind when they enact these fiscal changes so the result may not always be beneficial. If the public suspects that a tax cut or increase will be short term, they will simply spend or save accordingly so when they tax cut or increase occurs, they can continue to spend at the same level of consumption that they do now and thereby defeating the purpose of the fiscal change. Crowding out is when the government borrows money from the public sector and the decrease in avaliable funds, pushes some investment out.