3.8: Fiscal Policy

Question 1

Fiscal Policy

Answer 1

Actions taken by Congress to stabilize the economy

Question 2

Monetary Policy

Answer 2

Actions taken by the Federal Reserve Bank to stabilize the economy

Question 3

Discretionary Fiscal Policy

Answer 3

Congress creates a bill designed to change AD through gov spending or taxation. Faces the problem of bureaucratic lag times.

Question 4

Non-Discretionary Fiscal Policy

Answer 4

Permanent spending or taxation laws enacted to counter cyclically stabilize the economy. When the GDP goes down, gov. spending automatically increases and taxes automatically fall

Welfare, unemployment, income tax

Question 5

Contractionary Fiscal Policy to close inflationary gap

Answer 5

Laws that reduce inflation and decrease GDP like decreased gov spending, increased taxes which decrease disposableincome or a combination of the two

Question 6

Expansionary Fiscal Policy to close a recessionary gap

Answer 6

Laws that reduce unemployment and increase the GDP by increasing gov spending and decreasing taxes which increases disposable income

Question 7

The three time lags

Answer 7

Recogniton lag where congress must react to economic indicators before it’s too late, administrative lag where congress takes time to pass legislation, and operational lag where spending/planning takes time to organize and execute so changing taxing is quicker