Business Cycles and Fiscal Policy

A collection of flashcards covering key concepts in Business Cycles and Fiscal Policy to aid in studying and understanding macroeconomic principles.

What defines aggregate demand (AD)?

Total demand for all final goods and services in an economy.

What is the purpose of expansionary fiscal policy?

To stimulate growth and employment by shifting AD right.

How does the GDP deflator differ from the Consumer Price Index (CPI)?

The GDP deflator measures price changes for all GDP components, while CPI only measures consumer price changes.

What characterizes a recessionary gap?

It exists when aggregate demand intersects below full-employment output, leading to high unemployment and low output.

What is a contractionary fiscal policy intended to address?

To shift aggregate demand left when inflation, employment, and output levels are too high.

What is the definition of a cyclical deficit?

A deficit incurred when the government uses extra spending to try and pull an economy out of a recession.

Name one automatic stabilizer in fiscal policy.

Examples include Employment Insurance (EI) which increases payments during economic downturns.

What are the four phases of a business cycle?

1. Expansion/Recovery 2. Peak 3. Contraction/Recession 4. Trough.

What does the term 'crowding out' refer to in fiscal policy?

When government borrowing drives up interest rates, making it difficult for businesses to borrow.

How can fiscal policy be impacted by election cycles?

Governments may avoid making budget cuts or raising taxes when seeking re-election.

What is the marginal propensity to consume (MPC)?

Change in consumption divided by change in income.

What happens during the contraction phase of a business cycle?

Economic activity declines, resulting in rising unemployment and decreasing production.

Define 'leakage' in the circular flow of income model.

Any use of income that takes money out of the economy, such as savings or paying higher taxes.

What does a surplus budget indicate about the government's financial situation?

It signifies that the government collects more tax revenue than it spends.

What are discretionary fiscal policy actions?

Deliberate government actions to alter spending or tax policies.

What generates a recession as defined in the business cycle?

Real GDP is negative for a minimum of two consecutive quarters.