Econ Unit 7 Review

These flashcards cover key concepts related to Fiscal Policy including types of policies, their impacts, formulas, and examples.

What is Expansionary Fiscal Policy?

Increasing government spending and/or cutting taxes.

What is Contractionary Fiscal Policy?

Decreasing government spending and/or raising taxes.

In which type of output gap is Expansionary Fiscal Policy appropriate?

Recessionary Gap.

In which type of output gap is Contractionary Fiscal Policy appropriate?

Inflationary Gap.

What effect does Expansionary Fiscal Policy have on the AD-AS graph?

It shifts Aggregate Demand (AD) to the right.

What effect does Contractionary Fiscal Policy have on the AD-AS graph?

It shifts Aggregate Demand (AD) to the left.

What is Discretionary Fiscal Policy?

Policy where the government passes new laws specifically designed to change taxes or spending to influence aggregate demand.

What is Non-Discretionary Fiscal Policy?

Existing laws that automatically counteract the business cycle.

What are some examples of Non-Discretionary Policy?

Unemployment insurance.

What are some examples of Discretionary Policy?

New Deal policies.

What are some problems with fiscal policy?

Potential for budget deficits, need to borrow money, timing issues, and politically-motivated policies.

What are the timing problems associated with Fiscal Policy?

Recognition lag, legislative lag, and operational lag.

How does the government 'crowd out' spending by consumers and businesses?

Government spending can lead to side effects that counteract the intended effects.

What is the Marginal Propensity to Consume (MPC)?

The change in consumption caused by a change in disposable income.

How is the Marginal Propensity to Consume (MPC) calculated?

MPC = Change in consumption / Change in income.

What is the Marginal Propensity to Save (MPS)?

The change in saving caused by a change in disposable income.

How is the Marginal Propensity to Save (MPS) calculated?

MPS = 1 - MPC.

What is the Spending Multiplier?

The amount by which Aggregate Demand (AD) increases.

How is the Spending Multiplier calculated?

1 / (1 - MPC) = 1 / MPS.

What is the Tax Multiplier?

The effect of tax cuts/increases on spending.

How is the Tax Multiplier calculated?

MPC / MPS = Spending Multiplier - 1.

What is the Balanced Budget Multiplier?

An increase in government spending by $X, paid for with an $X increase in taxes, will lead to a $X increase in AD.

How is the Balanced Budget Multiplier calculated?

BBM = 1.

How can you calculate the Spending Change Needed to close an Output Gap?

Size of Gap / Spending Multiplier.