All Flashcards
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.
Analyze a graph showing expansionary fiscal policy.
AD curve shifts right, increasing output and price level. Real GDP increases, unemployment decreases.
Analyze a graph showing a recessionary gap.
The AD and SRAS curves intersect to the left of the LRAS curve. There is a gap between current output and potential output.
Analyze a graph showing an inflationary gap.
The AD and SRAS curves intersect to the right of the LRAS curve. The economy is producing beyond its potential.
Analyze a graph where expansionary fiscal policy closes a recessionary gap.
The AD curve shifts rightward until it intersects SRAS and LRAS at the full employment level of output.
Analyze a graph where contractionary fiscal policy closes an inflationary gap.
The AD curve shifts leftward until it intersects SRAS and LRAS at the full employment level of output.
What does the x-axis represent on an AD/AS graph?
Real GDP (output).
What does the y-axis represent on an AD/AS graph?
Price Level.
What does the LRAS curve represent?
The long-run aggregate supply, representing the potential output of the economy.
What does the SRAS curve represent?
The short-run aggregate supply, which is upward sloping.
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.