Ch 11 - Fiscal Policy Flashcards
aggregate demand
the total quantity of output demanded at alternative price levels in a given time period, ceteris paribus
income transfers
payments to individuals for which no current goods or services are exchanged, such as Social Security, welfare, unemployment benefits
fiscal policy
the use of government taxes and spending to alter macroeconomic outcomes
equilibrium (macro)
the combination of price level and real output that is compatible with both aggregate demand and aggregate supply
recessionary GDP gap
the amount by which equilibrium GDP falls short of full-employment GDP
macro perspective of federal budget
a tool that can shift aggregate demand and thereby alter macroeconomic outcomes
fiscal stimulus
tax cuts or spending hikes intended to increase (shift) aggregate demand
aggregate supply
the total quantity of output producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus
Keynesian perspective to get out of recession
get someone to spend more on goods and services
AD shortfall
the amount of additional aggregate demand needed to achieve full employment after allowing for price level changes
multiplier
the multiple by which an initial change in aggregate spending will alter total expenditure after an infinite number of spending cycles; = 1 / (1-MPC)
marginal propensity to consume (MPC)
the fraction of each addi9tional (marginal) dollar of disposable income spent on consumption; = change in consumption / change in disposable income
disposable income
after-tax income of consumers; = personal income - personal taxes
fiscal restraint
tax hikes or spending cuts intended to reduce (shift) aggregate demand
inflationary GDP gap
the amount by which equilibrium GDP exceeds full-employment GDP
AD excess
the amount by which aggregate demand must be reduced to achieve full-employment equilibrium after allowing for price-level changes
crowding out
a reduction in private-sector borrowing (and spending) caused by increased government borrowing
macro problem - weak economy (unemployment)
policy target - the AD shortfall
policy strategy - fiscal stimulus (rightward AD shift)
desired fiscal stimulus = AD shortfall / multiplier
1. increase government spending = desired fiscal policy
2. cut taxes = desired fiscal stimulus / MPC
3. increase transfers = desired fiscal stimulus / MPC
macro problem - overheated economy (inflation)
policy target - the AD excess
policy strategy - fiscal restraint (leftward AD shift)
desired fiscal restraint = AD excess / multiplier
1. reduce government purchases = desired fiscal restraint
2. increase taxes = desired fiscal restraint / MPC
3. reduce transfer payments = desired fiscal restraint / MPC
