Chapter 22 - Spending, output & fiscal policy

Fiscal policy

Fiscal policy

________ consists of two tools for affecting total spending and eliminating out put gaps:

Marginal propensity

________ to consume (mpc): amount by which consumption rises when disposable income rises by $ 1; we assume that 0 <mpc <1.

aggregate expenditure

Planned ________ (PAE): total planned spending on final goods and services.

ultimate effect

The ________ of a fiscal policy change on short- run equilibrium output equals the change in autonomous expenditure times the multiplier.

Firms

________ do not respond to every change in the demand for their products by changing their prices.

multiplier

The ________ arises because a given initial increase in spending raises the incomes of producers, which leads them to spend more, raising the incomes and spending of other producers, and so on.

autonomous expenditure

A reduction in taxes or an increase in transfer payments in creases ________ by an amount equal to the marginal propensity to consume times the reduction in taxes or increase in transfers.

Automatic stabilizers

________: provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines.

Wealth effect

________: tendency of changes in asset prices to affect households 'wealth and thus their consumption spending.

autonomous expenditure

An increase in government purchases increases ________ by an equal amount.

fiscal policy

Changes in spending and taxation take time and thus ________ can be relatively slow and inflexible.

autonomous expenditure

Generally, a one- unit change in ________ leads to a larger change in short- run equilibrium output, reflecting the working of the income- expenditure multiplier.

Menu costs

costs of changing prices

Planned aggregate expenditure (PAE)

total planned spending on final goods and services

Consumption function

relationship between consumption spending and its determinants, in particular, disposable income

Autonomous consumption

consumption spending that is not related to the level of disposable income

Wealth effect

tendency of changes in asset prices to affect households' wealth and thus their consumption spending

Marginal propensity to consume (mpc)

amount by which consumption rises when disposable income rises by $1; we assume that 0 < mpc < 1

Autonomous expenditure

portion of planned aggregate expenditure that is independent of output

Induced expenditure

portion of planned aggregate expenditure that depends on output Y

Expenditure line

line showing the relationship between planned aggregate expenditure and output

Short-run equilibrium output

level of output at which output Y equals planned aggregate expenditure PAE; the level of output that prevails during the period in which prices are predetermined

The Keynesian-cross diagram includes two lines

a 45° line that represents the condition Y = PAE and the expenditure line, which shows the relationship of planned aggregate expenditure to output

Stabilization policies

government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps

Expansionary policies

government policy actions intended to increase planned spending and output

Contractionary policies

government policy actions designed to reduce planned spending and output

Fiscal policy

decisions about how much the government spends and how much tax revenue it collects

Automatic stabilizers

provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines

Menu costs

Costs of changing prices

Planned aggregate expenditure (PAE)

Total planned spending on final goods and services

Consumption function

Relationship between consumption spending and its determinants, in particular, disposable income

Autonomous consumption

Consumption spending that is not related to the level of disposable income

Wealth effect

Tendency of changes in asset prices to affect households' wealth and thus their consumption spending

Marginal propensity to consume (mpc)

Amount by which consumption rises when disposable income rises by $1; we assume that 0 < mpc < 1

Autonomous expenditure

Portion of planned aggregate expenditure that is independent of output

Induced expenditure

Portion of planned aggregate expenditure that depends on output Y

Expenditure line

Line showing the relationship between planned aggregate expenditure and output

Short-run equilibrium output

Level of output at which output Y equals planned aggregate expenditure PAE; the level of output that prevails during the period in which prices are predetermined

Stabilization policies

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps

Expansionary policies

Government policy actions intended to increase planned spending and output

Contractionary policies

Government policy actions designed to reduce planned spending and output

Fiscal policy

Decisions about how much the government spends and how much tax revenue it collects

Automatic stabilizers

Provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines