Chapter 30

Fiscal policy, monetary policy

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