ap economics: module 21 terms

final change in real GDP

initial change in spending * SM

*can be negative (less spending)

t or f: changes in taxes and tranfers have a smaller effect on real GDP than changes in government spending

t: no direct effect on aggregate demand equation, impact DI first

tax multiplier

the factor by which a change in tax collections changes RGDP

• negative, since higher taxes will lower CS

• -MPC/(1-MPC)

• multiplier for a change in transfers is this, but positive

balanced budget multiplier

the factor by which a change in both spending and taxes changes RGDP

• add SM and TM —> always equals 1

lump-sum taxes

taxes that don’t depend on the taxpayer’s income

• one singular payment

ways government tax revenue changes

increases —> expansion, higher taxes, contractionary FP, increasing RGDP (and vice-versa)

automatic stabilizers

govt. spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and contractionary when the economy expands

discretionary fiscal policy

fiscal policy that is the result of deliberate actions by policy makers rather than rules