All Flashcards
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.
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.