Chapter 12 Flashcards
fiscal policy
changes in government purchases, taxes, transfers to achieve macroeconomic outcomes of steady growth, full employment and stable prices
- circular flow transmits the effects of fiscal policy
injection
spending in the circular flow not starting with consumers, exports
leakage
spending leaving out of the circular flow through net taxes, savings, imports
multiplier effect
spending injection has multiplied effect on AD
- multiplied increase in AD from: increased gov spending, tax cuts, and increased transfers
- multiplied decrease in AD from: decreased gov spending, tax increase, decreased transfers
formula for multipler effect
1/ % of leakages from additional income
- more leakages = smaller multiplier
- less leakages = longer multiplier
expansionary fiscal policy
increases AD by increased gov spending and decreasing taxes or increasing transfers
- shifts AD curve rightward (positive AD shock)
- counters a recessionary gap
contractionary fiscal policy
decreases AD by decreasing gov spending, increasing taxes or decreasing transfers
- shifts AD curve leftward (negative AD shock)
- counters an inflationary gap
when economy is below potential GDP
more increase in AD increases real GDP
when economy is at or above potential GDP
more of increase in AD drives up prices
hands off
- favours tax cuts to accelerate economy; spending reductions to slow economy
- believes long run benefits of increased AS outweigh short run mismatches between reduced AD & AS
- words used with gov: intervene, interfere, mistake
- USA’s origins created through a revolution against british gov interference
hands on
- favours government spending to accelerate economy; tax increases to slow economy
- worries short run costs of decreased AD and recession outweigh long run benefits of econ growth
- words used with gov: act, participate, responsibility
- Canadian origins created by an act of gov
gov policies to promote econ growth including spending and tax incentives
- to stimulate saving and increase quantity of capital
- for research and development
- for education and training increasing human capital
fiscal spending and tax policies can increase quantity and quality of inputs, increasing long run and short run as a potential GDP per person
supply side effects
incentive effects of taxes on AS
- supply siders believe tax cuts have powerful incentive effects and will increase not decrease government tax revenues
Laffer curve
graph showing that as tax rate increases, tax revenues increase, reach a max then decrease
gov budget scenarios
balanced budget: revenues = spending
budget deficit: revenues < spending
budget surplus: revenues > spending
automatic stabilizers
tax and transfer adjustments counteracting changes to real GDP without explicit government decisions
during contractions: tax revenues fall, transfer payments increase, supporting spending and AD but causing automatic budget deficit
during expansions: tax revenues rise, transfer payments decrease, reducing spending and AD but causing automatic budget surplus
cyclical deficits and surpluses
created only as a result of automatic stabilizers counteracting business cycles
economists are most concerned with structural deficits and surpluses
deficits and surpluses are
FLOWS
debt is a
STOCK
national debt/ public debt
total amount owed by government = sum of past deficits MINUS sum of past surpluses
potential problem of national debt
interest payments create self perpetuating debt
- canada’s yearly deficits between mid 1970-1990 and increasing national debt and interest payments increase yearly deficits
crowding out
when government debt financed fiscal policy decreases private investment by raising interest rates
crowding in
when government debt financed fiscal policy increases private investment by improving expectations
