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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 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.