Chapter 22 - Spending, output & fiscal policy

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Fiscal policy

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43 Terms

1

Fiscal policy

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

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2

Marginal propensity

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

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3

aggregate expenditure

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

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4

ultimate effect

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

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5

Firms

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

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6

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.

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7

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.

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8

Automatic stabilizers

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

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9

Wealth effect

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

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10

autonomous expenditure

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

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11

fiscal policy

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

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12

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.

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13

Menu costs

costs of changing prices

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14

Planned aggregate expenditure (PAE)

total planned spending on final goods and services

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15

Consumption function

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

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16

Autonomous consumption

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

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17

Wealth effect

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

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18

Marginal propensity to consume (mpc)

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

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19

Autonomous expenditure

portion of planned aggregate expenditure that is independent of output

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20

Induced expenditure

portion of planned aggregate expenditure that depends on output Y

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21

Expenditure line

line showing the relationship between planned aggregate expenditure and output

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22

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

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23

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

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24

Stabilization policies

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

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25

Expansionary policies

government policy actions intended to increase planned spending and output

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26

Contractionary policies

government policy actions designed to reduce planned spending and output

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27

Fiscal policy

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

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28

Automatic stabilizers

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

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29

Menu costs

Costs of changing prices

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30

Planned aggregate expenditure (PAE)

Total planned spending on final goods and services

New cards
31

Consumption function

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

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32

Autonomous consumption

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

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33

Wealth effect

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

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34

Marginal propensity to consume (mpc)

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

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35

Autonomous expenditure

Portion of planned aggregate expenditure that is independent of output

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36

Induced expenditure

Portion of planned aggregate expenditure that depends on output Y

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37

Expenditure line

Line showing the relationship between planned aggregate expenditure and output

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38

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

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39

Stabilization policies

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

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40

Expansionary policies

Government policy actions intended to increase planned spending and output

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41

Contractionary policies

Government policy actions designed to reduce planned spending and output

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42

Fiscal policy

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

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43

Automatic stabilizers

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

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