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What is the impact of increased government spending on unemployment?
It decreases unemployment by increasing aggregate demand and creating jobs.
What is the impact of decreased taxes on consumer spending?
It increases consumer spending by increasing disposable income.
What is the impact of increased taxes on inflation?
It decreases inflation by reducing aggregate demand.
What is the impact of decreased government spending on real GDP?
It can lead to a slight decrease in real GDP.
What is the impact of expansionary fiscal policy on the price level?
It can cause a rise in the price level (inflation).
What is a potential drawback of using discretionary fiscal policy?
Lags in implementation and effectiveness.
How effective is fiscal policy in stabilizing the economy?
Effective, but subject to lags and potential crowding-out effects.
What are the limitations of using fiscal policy?
Lags, political considerations, and the potential for crowding out private investment.
What are the potential long-term effects of expansionary fiscal policy?
Increased debt and potential inflationary pressures.
What are the potential long-term effects of contractionary fiscal policy?
Slower economic growth and potentially higher unemployment.
What is Fiscal Policy?
Government management of the economy through government spending and taxation.
What is Expansionary Fiscal Policy?
Increasing government spending or decreasing taxes to boost the economy during a recession.
What is Contractionary Fiscal Policy?
Decreasing government spending or increasing taxes to cool down the economy during inflation.
What is Discretionary Fiscal Policy?
Deliberate actions by Congress to change AD through new spending or tax laws.
What is Non-Discretionary Fiscal Policy?
Automatic stabilizers already in place, like social security and unemployment benefits.
What is a Recessionary Gap?
Economy producing less than its potential; high unemployment, low output.
What is an Inflationary Gap?
Economy producing more than its potential; high inflation, potential overheating.
What is the Spending Multiplier?
How much total spending increases for each dollar of government spending. Formula: 1/MPS
What is the Tax Multiplier?
How much total spending changes for each dollar change in taxes. Formula: MPC/MPS
What is Marginal Propensity to Consume (MPC)?
The proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.
How does expansionary fiscal policy apply during a recession?
It increases government spending and decreases taxes, shifting the AD curve to the right, increasing output and reducing unemployment.
How does contractionary fiscal policy apply during inflation?
It decreases government spending and increases taxes, shifting the AD curve to the left, decreasing price levels.
How do automatic stabilizers work during a recession?
Unemployment benefits increase, providing income to those who lost jobs, thus maintaining some level of aggregate demand.
How does increased government spending impact Aggregate Demand?
Increased government spending directly increases aggregate demand, shifting the AD curve to the right.
How do tax cuts affect disposable income and consumer spending?
Tax cuts increase disposable income, leading to increased consumer spending, which shifts the AD curve to the right.
How does fiscal policy address a recessionary gap?
Expansionary fiscal policy shifts the AD curve to the right, increasing output and employment to close the gap.
How does fiscal policy address an inflationary gap?
Contractionary fiscal policy shifts the AD curve to the left, decreasing price levels to close the gap.
If MPC is 0.75, how much does the economy grow for every $1 increase in government spending?
The spending multiplier is 1/(1-0.75) = 4. So, the economy grows by $4.
If MPC is 0.6, how much does the economy change for every $1 decrease in taxes?
The tax multiplier is 0.6/(1-0.6) = 1.5. So, the economy grows by $1.5.
How does government spending compare to tax cuts in stimulating the economy?
Government spending is more effective because it directly increases aggregate demand, while tax cuts may lead to some savings.