Fiscal Policy 1 (terms and concepts)

Fiscal Policy (defined)

Changes in G or T to alter AD. (Note: The T in this context is taxes on households, not firms).

Which government entity is responsible for Fiscal Policy?

Congress

The kind of Fiscal Policy you need when you are in a recessionary gap.

Expansionary

The kind of Fiscal Policy you need when you are in an inflationary gap.

Contractionary

What kind of fiscal policy is needed if actual output < potential output?

Expansionary

What changes to T would have a "contractionary impact" on AD?

Increasing T (aka taxes on households)

What changes to G would have an "expansionary impact" on AD?

Increasing G (aka government spending)

If there is demand pull inflation, what kind of Fiscal Policy is needed?

Contractionary. (The logic is this: if there is cost push inflation we must be in a boom cycle, which means the economy is in danger of overheating. Time to tap the brakes).

If the unemployment rate were above the NRU, list two specific fiscal policies that could improve the situation.

Increase G; or Cut T

Fiscal policy works by targeting the ________ curve.

AD. It cannot target AS.