Fiscal Policy Lecture Notes

Flashcards about Fiscal Policy

Fiscal Policy

Government policymakers set the level of government spending and taxation.

Expansionary Fiscal Policy

A policy that increases aggregate demand through increased government spending or decreased taxes.

Contractionary Fiscal Policy

A policy that decreases aggregate demand through decreased government spending or increased taxes.

Effect of increase in Aggregate Demand

Output and price level increases in the short run.

Effect of decrease in Aggregate Demand

Output and price level fall in the short run.

Discretionary Fiscal Policy

Deliberate, new legislation passed to impact the macroeconomy.

Automatic Stabilizers

Automatic changes in fiscal policy that stimulate aggregate demand during a recession without deliberate action from policymakers (e.g., income tax system, welfare).

Investment Tax Credit

A tax break to firms that invest in new capital, advocated by John Keynes and enacted in 1964.