3.8: Fiscal Policy Flashcards
What is the most important part of the economy?
Consumption
Autonomous Consumption
consumers will spend a certain amount no matter what, regardless of their income.
What is consumer spending made up of?
Autonomous consumption and disposable income
Disposable income
Income after tax
Dissaving
Negative savings
income is less than autonomous spending
How can the Government stabilize the economy?
Fiscal Policy and Monetary Policy
Fiscal Policy
Actions by Congress to stabilize the economy
Monetary Policy
Actions by Federal Reserve Bank to stabilize the economy
Discretionary Fiscal Policy
Congress creates a new bill that is designed to change AD through gov. spending r taxation
One problem is lag times due to bureaucracy
It takes time for Congress to act
Ex: In a recession, Congress increases spending
Non-Discretionary Fiscal Policy
AKA: Automatic Stabilizers
Permanent spending or taxation laws enacted to work to counter cyclically to stabilize the economy
When GDP goes down, gov. spending automatically increases, and taxes automatically fall
Ex: Welfare, Unemployment, Income Tax
What can the gov. do to the economy when they use fiscal and/or monetary policy?
Speed up or slow down the economy
Contractionary Fiscal Policy (The Brake)
Laws that reduce inflation, decrease GDP (close an Inflationary Gap)
Decrease Gov. Spending
Increase Taxes (Decreasing disposable Income)
Combo of the two
Expansionary Fiscal Policy (The Gas)
Laws that reduce unemployment & increase GDP(close a Recessionary Gap)
Increase Gov. Spending
Decrease Taxes (Increasing disposable income)
Combo of the Two
What is a problem of fiscal policy ?
It takes time to go into effect
What are the fiscal policy lags?
Recognition Lag: Congress must react to economic indicators before it’s too late
Administrative Lag: Congress takes time to pass legislation
Operational Lag: Spending/planning takes time to organize and execute (changing taxing is quicker)
