ap economics: module 20 terms

stabilization policy

stabilization policy

the use of govt. policy to reduce the severity of recessions and reign in excessively strong expansions

• fiscal policy is used to push economy to Yp when AD shifts

• ability to improve economy depends on the type of shock

why is short-circuiting self-correction due to a negative demand shock desirable?

1. avoid unemployment from falling a.o.

2. ensure price stability by preventing deflation

IMPORTANT INFO

much harder to fix a negative supply shock (compared to a negative demand shock), since 2 bad things are happening at once

• fiscal/monetary policy can fix a demand shock

3 programs that are part of U.S. transfers and social insurance

1. Social Security

2. Medicare

3. Medicaid

Social Security

guaranteed income to seniors, people who are disabled, spouses + dependent children

Medicare

covers healthcare costs for seniors (65+)

Medicaid

covers healthcare costs for low-income families

social insurance

government programs that are intended to protect families against economics hardship

• paid by social insurance/wage taxes

aggregate spending

= GDP = C + I + G + NE

t or f: changes in taxes and transfers impact C and I

t: for C, they impact DI, and for I, they tax profits

*govt. can shift ADC

expansionary fiscal policy

increases AD

• used in recessionary gap for a R shift

• more G, less taxes, more transfers

contractionary fiscal policy

decreases AD

• use in inflationary gap for a L shifts

• less G, more taxes, less transfers

lags in fiscal policy

• realize recessionary gap exists

• collect + analyze data

• create spending plan

• pass plan

• spend money

*economy may have recovered OR become an inflationary gap

recognition lag: don't realize a gap exists

decision lag: passing legislation

implementation lag: takes time to spend money

changes in transfers and taxes affect what parts of RGDP?

C and I

discretionary fiscal policy

intentional government policies to increase or decrease government spending or taxation

nondiscretionary fiscal policy

policies that are built into the system so that an expansionary or contractionary stimulus can be given automatically

cost-push inflation

overall prices rise (inflation) due to increases in production costs such as wages and raw materials

demand-pull inflation

increasing demand leads to higher prices