All Flashcards
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.
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.
What are the differences between discretionary and non-discretionary fiscal policy?
Discretionary is deliberate, requiring congressional action. Non-discretionary is automatic, like unemployment benefits.
What are the differences between expansionary and contractionary fiscal policy?
Expansionary boosts the economy (increase G, decrease T). Contractionary cools it down (decrease G, increase T).
What are the differences between the spending multiplier and the tax multiplier?
Spending multiplier is 1/MPS, while the tax multiplier is MPC/MPS. The spending multiplier is larger.
What are the differences between fiscal policy and monetary policy?
Fiscal policy uses government spending and taxation; monetary policy uses interest rates and the money supply.
What are the differences between a recessionary gap and an inflationary gap?
Recessionary gap: output below potential. Inflationary gap: output above potential.
Compare and contrast the effects of increasing government spending versus decreasing taxes.
Both increase AD, but government spending has a more direct and larger impact due to the spending multiplier.
Compare and contrast the effects of increasing taxes versus decreasing government spending.
Both decrease AD, but increasing taxes directly reduces disposable income, while decreasing government spending directly reduces government purchases.
What are the key differences between the short-run and long-run effects of fiscal policy?
In the short run, fiscal policy affects output and prices. In the long run, it can affect potential output and debt levels.
How does the effectiveness of fiscal policy differ in a closed vs. an open economy?
In an open economy, fiscal policy can be affected by exchange rates and international trade flows.
Compare the advantages and disadvantages of discretionary vs. automatic fiscal policy.
Discretionary policy can be tailored but suffers from lags; automatic policy is timely but less precise.