Fiscal Policy Flashcards

Fiscal Policy and the Multipliers Flashcards

Aggregate Demand (AD) - Demand Shocks

A change in any component of GDP (C+Ig+G+Xn); it can be positive or negative.

Short-Run Aggregate Supply (SRAS) - Supply Shocks

A change of input prices or productivity; it can be positive or negative.

Long-Run Aggregate Supply (LRAS)

A change in the quantity or quality of factors of production, or any technological progress; signifies full employment level of output, NRU, and economic capacity have all changed.

Stabilization Policy

Policies aimed at reducing the severity of recessions and fighting excessively strong expansions.

Fiscal Policy

Government's actions that shift AD, stemming from changes in spending for G, as well as C and Ig.

Expansionary Fiscal Policy

Increase government purchases of goods and services, decrease in taxes, increase in government transfer payments.

Contractionary Fiscal Policy

Decrease in government purchases of goods and services, increase in taxes, decrease in government transfer payments.

Discretionary Fiscal Policy

When the government takes deliberate action to impact AD.

Automatic Stabilizers / Nondiscretionary Fiscal Policy

Actions that happen automatically

Average Propensity to Save (APS)

Percentage of total income that is saved (saving/income).

Average Propensity to Consume (APC)

Percentage of total income that is consumed (consumption/income).

Marginal Propensity to Save (MPS)

The fraction of any income change that is saved (change in savings/change in income).

Marginal Propensity to Consume (MPC)

The fraction of any income change that is spent (change in consumption/change in income).

Spending Multiplier Formula

Δ autonomous spending x ME = Δ GDP; ME = 1/(1-MPC) or 1/MPS

Tax Multiplier Formula

(-Δ T) × MT = Δ GDP; MT = ME – 1

Balanced budget AND a $50 billion net increase in GDP!

A $50 billion increase in G AND A $50 billion increase in taxes would balance the budget

Balanced Budget Multiplier

When the government wants to close a recessionary gap of $50 billion while maintaining a balanced budget.