AP Econ: Chapter 21

Fiscal Policy

The federal government's tools to impact the economy through changes in government spending and taxes.

Automatic Fiscal Policy

Federal expenditures and tax changes already in place that kick in automatically.

Discretionary Fiscal Policy

New government spending or tax changes that require Congress approval.

Expansionary Fiscal Policy

Aims to address unemployment or recession by increasing government spending, cutting taxes, or both.

Contractionary Fiscal Policy

Aims to combat inflation by decreasing government spending, increasing taxes, or both.

Spending Multiplier

Equation SM = 1 / MPS used to calculate the impact of changes in government spending on Real GDP or Aggregate Demand.

Tax Multiplier

Equation TM = 1 - SM used to calculate the impact of changes in taxes on Real GDP or Aggregate Demand.

Balanced Budget Multiplier

Equation BBM = 1 used to calculate the impact of equal changes in government spending and taxes on Real GDP or Aggregate Demand.

Supply Side Economics

Economic approach focusing on increasing Aggregate Supply by lowering taxes, reducing regulations, and promoting innovation.

Laffer Curve

Concept suggesting that lowering high tax rates can increase tax revenue by incentivizing individuals to work more and generate more income.

How do you summarize a recessionary gap?

Recessionary=expansionary= +GDP gap

How do you summarize an inflationary gap?

Inflationary=contractionary= -GDP gap

How do I know if a graph is recessionary or inflationary?

If the full employment line is above the equilibrium, then it is recessionary. (you need to recede the economy to move it to equilibrium and you will have a positive GDP gap) If the full employment line is below the equilibrium, then it is inflationary. (you need to inflate the economy to move it up to equilibrium and you will have a negative GDP gap)