Fiscal Policy

Expansionary Fiscal Policy

Government measures, such as decreasing taxes or increasing spending, aimed at increasing aggregate demand (AD) and GDP.

Fiscal Policy

The government's use of taxation and spending to influence the economy.

Automatic Stabilizers

Built-in fiscal mechanisms like progressive income taxes and transfer payments that automatically counteract economic fluctuations without new legislation.

Contractionary Fiscal Policy

Government actions that decrease spending or increase taxes with the goal of reducing aggregate demand, real GDP, and inflation.

Effects of Contractionary Fiscal Policy

Includes lower inflation, full employment in an overheating economy, and stable economic growth.

Progressive Taxes

Tax system where higher income individuals pay a higher tax rate, which acts as a stabilizer during economic fluctuations.

Transfer Payments

Payments made by the government to individuals, like unemployment benefits, that help maintain consumer spending.

Impact of Recession on Government Budgets

During a recession, government faces lower tax revenue and higher expenditure, leading to budget deficits.

Impact of Economic Boom on Government Budgets

During an economic boom, government experiences higher tax revenue and lower expenditure, leading to budget surpluses.

Long Run Economic Growth

Sustained increase in the economy's capacity to produce goods and services, which can be influenced by effective fiscal policy