All Flashcards
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.
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.
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.