Chapter 13: Fiscal GDP Flashcards
What is Fiscal Policy?
The discretionary changing of government spending/expenditures and taxes
What is the Crowding Out Effect
The tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the private sector This decrease normally results from the rise in interest rates.
(increased government expenditures and decreased investment)
The Ricardian Equivalence Theorem……
implies that an increase in the government budget deficit has no effect on aggregate demand
Direct Expenditure Offsets are
Actions on the part of the private sector in spending income that offset government fiscal policy action Any increase in government spending in an area that competes with the private sector will have some direct expenditure offset
A Laffer Curve is
an inverse relationship between tax rates and tax revenues. a positive relationship between tax rates and tax revenues
Supply Side Economics is
The suggestion that creating incentives for individuals and firms to increase productivity will cause the aggregate supply curve to shift outward
Recognition Time Lag is
The time required to gather information about the current state of the economy
Action Time Lag is
congressional meetings, discussions, arguments, debates over fiscal policy, and subsequent signing or vetoing by the President of a bill. They can be extremely long and may take several years before an impact is felt.
Effect Time Lag is
The time that elapses between the implementation of a policy and the results of that policy
Automatic or Built-In Stabilizers are
Special provisions of certain federal programs that cause changes in desired aggregate expenditures without the action of Congress and the president
when an economist is using the term “discretionary” as in discretionary spending, they are referring to the…
amount of government spending decided upon by Congress or the government’s ruling body
recessionary gap…
to bring the economy back to full-employment real GDP…an increase in government spending.
inflationary gap…
to correct this gap…a decrease in government spending and an increase in taxes can be enacted
increased government spending crowds out investment due to…
higher interest rates
crowding out occurs when…
increases in government spending cause interest rates to rise, reducing investment and consumption
