18 Flashcards
What is fiscal policy?
fed gov plicy on taxes, spending, borrowing
What is contractionary fiscal policy?
tax increases or spending cuts
What is expansionary fiscal policy?
tax cuts or spending increases
What is crowding out?
decrease in private spending when gov spending increases
What is the multiplier effect?
additional increase in spending caused by the intital increase in gov spending
When is fiscal policy most effective?
with a higher multiplier, caused by unemployed resources, spending on the unemployed, tax cuts to people who spend, tax savings, doesn’t crowd out private consumption
What are the challenges to fiscal policy?
size, timing, target taxes or spending, how to finance, addressing real supply shocks
What is Ricardian Equivalence?
people see low taxes mean higher taxes in the future, don’t spend the extra income
What are automatic stabilizers?
changes in fiscal policy that stimulate ad in a recession without explicit action by policymakers
PROGRESSIVE TAX RATES, welfare, food stamps, unemployment insurance
keep private spending higher
no significant lags
Why is fiscal policy challenging with supply shocks?
it will raise inflation instead of gdp
What is ideal vs. common sense fiscal policy?
ideal: increase spending in bad, decrease in good
common sense: cut back in bad, increase in good
