3.6: Fiscal Policy

What is autonomous consumption?

A certain amount of money that consumers spend regardless of their income.

Consumer spending is made up of ___ and ___. (types of spending)

autonomous spending, disposable income

What is disposable income?

Income after taxes and expenses are paid for.

If incomes are less than autonomous spending, there is ____, also known as ____.

dissaving, negative savings

What are the two policies the government can use to stabilize the economy?

Fiscal policy and monetary policy.

Fiscal policy is actions by ____ to stabilize the economy, while monetary policy is actions by ____ to stabilize the economy.

Congress, Federal Reserve Bank

Define discretionary fiscal policy.

A problem with discretionary policy is ____ due to bureaucracy.

In a recession, Congress ____ spending.

Congress creates new bills designed to change AD through government spending or taxation.

lag times

increases

Define non-discretionary fiscal policy.

Non-discretionary policy is also known as ____.

Example: When there is high unemployment, unemployment benefits (a type of non-discretionary fiscal policy) ____ consumer spending.

Permanent spending or taxation laws enacted to stabilize the economy.

automatic stabilizers

increase

Contractionary fiscal policy (reduces/increases) inflation and (increases/decreases) GDP. It’s used to close an (inflationary/recessionary) gap.

Contractionary fiscal policies (increases/decreases) government spending and typically (increases/decreases) taxes, which (increases/decreases) disposable income.

reduces, decreases, inflationary, decreases, increases

Expansionary fiscal policy (reduces/increases) unemployment and (increases/decreases) GDP. It’s used to close an (inflationary/recessionary) gap.

Expansionary fiscal policies (increases/decreases) government spending and typically (increases/decreases) taxes, which (increases/decreases) disposable income.

reduces, increases, increases, decreases, increases