U18-Fiscal Policy

what is definition of fiscal policy?

changing government spending and revenue for stability

what happens during expansionary monetary policy? (spending and tax)

spending increases, tax decreases

what are automatic stabalizers?

"rules" that kick in during inflation or recession, such as tax and welfare programs

why is fiscal policy less effective?

crowding out, information lag, and response lag

what is crowding out?

when expansionary fiscal policy increases cost of borrowing and decreases aggregate demand

what is tax multiplier?

how much amplification on the effect of change in government spending

what is definition of balanced budget multiplier?

if spending and tax was increased by same amount, then fiscal stimulus will be equivalent to spending change

formula for tax multiplier

1/MPS

MPC formula

change in spending/change in income

total change in aggregate demand formula

tax multiplier * initial change in spending

what is deficit calculated as?

difference between govt revenue and spending

how often is deficit calculated?

annually

classic economists focus on the

long run

keynesian economists focus on the

short run

fiscal policy is made less effective by…

rational expectations and crowding out

the theory of rational expectations assumes that

individuals/firms adjust their economic actions accordingly based on available economic information and past information/experiences