Econ Chapter 15 Notes

Question 1

Fiscal Policy?

Answer 1

• Federal government’s use of taxation and spending policies to affect overall business activity
• Conducted by Congress and the President

Question 2

Keynesian Economics?

Answer 2

• Also called demand-side policies
• Attempts to stimulate economic growth by increasing aggregate demand (spending)

Question 3

During Contraction?

Answer 3

Government should spend more, decrease taxes to increase aggregate demand

Question 4

During Peak?

Answer 4

Government should spend less, increase taxes to reduce aggregate demand

Question 5

Automatic Stabilizers?

Answer 5

• Government programs designed to maintain aggregate demand during contraction
• Ex: unemployment insurance, progressive income tax, workers’ compensation

Question 6

Limitations?

Answer 6

• Theory of fiscal policy never ends up reality because of different government bodies and political process; inability to reduce spending
• Time lags occur meaning fiscal policy can take years to have an effect
• Many fiscal policies have occurred after it’s too late