Introduction to Economics Chapters 24, 25, 26 on Fiscal and Monetary Policy

Is expansionary fiscal policy used during a recession or inflation?

Used during a recession

Does expansionary fiscal policy cause aggregate demand to increase or decrease?

Increases aggregate demand

What are the (3) tools used to increase aggregate demand?

1. Increase government spending

2. Decrease taxes

3. Increase transfer payments

What are the effects of increasing aggregate demand?

• Higher GDP

• Higher prices

• Lower unemployment

• Budget deficit usually increases

Is contractionary fiscal policy used during a recession or inflation?

Used during inflation

Does contractionary fiscal policy cause aggregate demand to increase or decrease?

Decreases aggregate demand

What are the tools used to decrease aggregate demand?

1. Decrease government spending

2. Increase taxes

What are the effects of decreasing aggregate demand?

• Lower GDP

• Inflation pressure

How does this affect aggregate demand: increase in consumer spending

Shift AD to the right

How does this affect aggregate demand: increase in investment (machinery, buildings, etc.)

Shift AD to the right

How does this affect aggregate demand: increase in government spending

Shift AD to the right

How does this affect aggregate demand: increase in net exports

Shift AD to the right

How does this affect aggregate demand: tax cuts

Shift AD to the right

How does this affect aggregate demand: decrease in investment

Shift AD to the left

How does this affect aggregate demand: decrease in consumer spending

Shift AD to the left

How does this affect aggregate demand: decrease in government spending

Shift AD to the left

How does this affect aggregate demand: increase in taxes

Shift AD to the left

What are automatic stabilizers?

Government programs that happen automatically without new laws
Examples: unemployment insurance, progressive income taxes, welfare benefits, SNAP