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How to calculate budget balance
taxes - government spending
Another name for the budget balance
Public savings
What is fiscal policy designed to achieve?
Full-employment, encourage economic growth, and control inflation
When is expansionary fiscal policy used?
During a recession. It increases government spending and decreases taxes, leading to a budget deficit.
How to calculate the change in GDP based on government expenditures
change of government expenditures * 1/1-MPC
How to calculate change in GDP based on taxes
change of taxes * -(MPC/1-MPC)
How to calculate change in GDP based on the change in consumption
change of consumption * 1/1-MPC
When is contractionary fiscal policy used?
Used during inflation. Decreases government spending, increases taxes, and creates a budget surplus
What is monetary policy?
How much money there is in the economy as well as interest rates on borrowing money
What is fiscal policy?
How much the government collects in taxes and how much it spends and borrows.
What is another term for discretionary fiscal policy?
Automatic stabilizers
How do automatic stabilizers work?
Taxes vary directly with GDP and transfer payments vary inversely with GDP. Reduces the severity of business fluctuations
Progressive tax system
When income increases, taxes increase
Proportional tax system
Where taxes stay fixed regardless of income
Regressive tax system
When income increases, taxes decrease
What happens when automatic stabilizers are in place when the GDP is higher than the preferred GDP?
More taxes, fewer transfer payments, budget surplus for government, income decreases for citizens, and spending and GDP decreases
What happens when automatic stabilizers are in place when the GDP is lower than the preferred GDP?
Fewer taxes, more transfer payments, budget deficit for government, income increases for citizens, and spending and GDP increases
Problems with discretionary fiscal policy
Recognition lag, legislative lag, implementation lag, crowding-out effect
Recognition lag
Where it takes time for the government to determine the problem with the economy
Legislative lag
Where it takes time for the government to pass policies to fix economic problems
Implementation lag
Where it takes time for policies to fix the economy to actually work
Crowding-out effect
Where the government borrows money from the market, decreasing the quantity of financial capital and increasing the interest rate.
Long-term effect of crowding-out effect
Demand increases due to citizens seeing the government putting in effort, leading to economic confidence
Note
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