Fiscal Policy: Expansionary and Contractionary Effects

Expansionary Fiscal Policy

Increases aggregate demand to boost economic activity.

Contractionary Fiscal Policy

Decreases aggregate demand to curb inflation.

Potential GDP

Maximum sustainable output level of an economy.

Aggregate Demand Shift

Movement from AD0 to AD1 due to policy changes.

Equilibrium Output

Level of output where supply meets demand.

Long-Run Aggregate Supply (LRAS)

Vertical line indicating potential GDP at full employment.

Inflationary Increase

Rise in price level due to high demand.

Discretionary Fiscal Policy

Government actions to change spending or taxes.

Automatic Stabilizers

Tax/spending rules that stabilize economic fluctuations.

Unemployment Insurance

Financial assistance for unemployed individuals.

Food Stamps

Government aid for purchasing food.

Standardized Employment Budget

Adjusted budget deficit/surplus at potential GDP.

Actual Budget Deficit

Current year deficit without adjustments for GDP.

Cyclically Adjusted Budget

Budget deficit adjusted for economic cycles.

Crowding Out

Government borrowing raises interest rates, reducing investment.

Interest Rate Shift

Change in rates due to government borrowing.

Recognition Lag

Time to identify a recession's occurrence.

Legislative Lag

Time to pass fiscal policy legislation.

Implementation Lag

Delay in fund distribution for fiscal programs.

Balanced Budget Debate

Arguments for and against a balanced federal budget.

Economic Boom

Period of high economic growth and low unemployment.

Long-Term Investments

Spending on infrastructure to enhance productivity.

Fiscal Policy Impact

Influence of government spending/taxation on economy.