Fiscal Policy Overview

These flashcards summarize key concepts related to fiscal policy, including its mechanisms, effects on aggregate demand, and the implications of government actions during economic fluctuations.

What is fiscal policy?

Fiscal policy refers to the use of government spending and taxation to influence the economy.

What is the intent of contractionary fiscal policy?

The intent of contractionary fiscal policy is to decrease aggregate demand.

What combination of actions would cause a shift from AD1 to AD2?

A decrease in taxes and an increase in government purchases.

What is the appropriate action to close a GDP-gap when consumption is $400 billion, investment is $40 billion, government purchases are $90 billion, and net exports are $25 billion?

An increase in government purchases and a decrease in taxes.

What does expansionary fiscal policy do?

It would move the economy from point B towards point C on the graph.

What would be the total increase in GDP from a $2 billion increase in government purchases with an MPC of 0.8?

$10 billion.

If the current level of output is below full-employment output, what action should the government take with an MPC of 0.75?

Increase government purchases by $100.

What is the expected new equilibrium after the government adopts an appropriate discretionary fiscal policy during a recession?

P2 and Q2.

Which fiscal policy change would be the most expansionary?

A $30 billion increase in government purchases and a $10 billion tax cut.

How does the progressive income-tax system function as an automatic stabilizer during economic decline?

It automatically lowers tax revenues as personal incomes decrease.

What is an advantage of automatic stabilizers over discretionary fiscal policy?

Automatic stabilizers do not experience the timing problems that discretionary fiscal policy does.

What phenomenon describes how crowding out may occur during expansionary fiscal policy?

Crowding out may occur because expansionary fiscal policy usually involves the government borrowing money.

How does crowding out affect the effectiveness of expansionary fiscal policy?

Crowding out reduces the effectiveness of expansionary fiscal policy.