Chapter 11: Fiscal Policy Lecture Notes

These vocabulary flashcards cover the core concepts, formulas, and terminology of fiscal policy including stimulus, restraint, multipliers, and political limitations as presented in the lecture notes.

Fiscal Policy

The use of government taxes and spending to alter macroeconomic outcomes.

Income Transfers

Payments to individuals for which no current goods or services are exchanged, such as Social Security, welfare, and unemployment benefits.

Recessionary GDP Gap

A situation that occurs when equilibrium $GDP$ falls short of full-employment $GDP$.

Fiscal Stimulus

Tax cuts or spending hikes intended to increase (shift) aggregate demand.

AD Shortfall

The amount of additional aggregate demand needed to achieve full employment after allowing for price level changes.

Multiplier

The multiple by which an initial change in aggregate spending will alter total expenditure after an infinite number of spending cycles, calculated as $\frac{1}{1 - MPC}$.

Desired Fiscal Stimulus

The amount of stimulus calculated as $\frac{\text{AD shortfall}}{\text{Multiplier}}$.

Fiscal Restraint

Tax hikes or spending cuts intended to reduce (shift) aggregate demand.

AD Excess

The amount by which $AD$ must be reduced to achieve full-employment equilibrium after allowing for price level changes.

Inflationary GDP Gap

A situation that occurs when equilibrium $GDP$ exceeds full-employment $GDP$.

Desired Fiscal Restraint

The amount of restraint calculated as $\frac{\text{AD excess}}{\text{Multiplier}}$.

Balanced Budget Multiplier

The principle that an increase in government spending paid for by an increase in taxes of equal size shifts aggregate demand to the right, with a multiplier equal to $1$.

Crowding Out

A reduction in private sector borrowing and spending caused by increased government borrowing.

Time Lags

The limitation of fiscal policy caused by the time required to recognize a problem, develop a strategy, pass legislation, and implement the policy.

Pork Barrel Politics

Politics where members of Congress are reluctant to sacrifice spending projects in their own districts or raise taxes before an election, altering the content and timing of fiscal policy.

The CARES Act (March 2020)

Legislation that put $2.2\text{ trillion}$ into the hands of consumers to boost $GDP$ during the pandemic, demonstrating the multiplier effect.

Budget Control Act of 2011

An act that cut defense spending from $837\text{ billion}$ in 2011 to $770\text{ billion}$ in 2013, resulting in significant job losses and a reduction in $GDP$.