Fiscal Policy Overview

These flashcards cover key concepts related to fiscal policy, including definitions, tools, impacts, and theoretical underpinnings.

What is fiscal policy?

The use of government taxes and spending to alter macroeconomic outcomes.

What causes unemployment according to Keynesian theory?

If aggregate demand (AD) is too little.

What is the purpose of fiscal stimulus?

To increase aggregate demand and shift the economy back to full-employment GDP.

What are the tools of fiscal stimulus?

Increasing government purchases, reducing taxes, and raising income transfers.

How does the AD shortfall differ from the real GDP gap?

The AD shortfall measures cumulative spending required to achieve full employment, while the GDP gap is the difference between existing GDP and full-employment GDP.

What is the multiplier effect?

A cycle in which initial changes in spending lead to further increases in income and consumption.

What is fiscal restraint?

Tax hikes or spending cuts intended to decrease aggregate demand.

What happens if too much fiscal stimulus is applied?

It may lead to excessive spending and inflation.

What are the risks of government intervention in fiscal policy?

Potential for ineffective policies, economic imbalances, and political challenges.

What is crowding out in the context of fiscal policy?

Reduction in private sector borrowing and spending caused by increased government borrowing.