Exam 3 - Chapter 13 Flashcards
True or False: The financial market (AD and AS) will correct itself in the long-run if the government fails to correct itself.
True
When government uses Fiscal Policy to affect AD:
Government spending affects _– of AD
Tax policies affect ___ of AD
Gov. Spending affects “G”
Tax Policies affect “Consumption and Investments”
Why should the government use Fiscal Policy to correct a market where GDP is above Potential GDP?
Because markets can expand too rapidly
*Housing market bubble of 2000s
3 limitations to Fiscal Policy?
- Fiscal Policy is educated guess
- Public Debt
- Time lag (takes long for fiscal policy to do its work to correct a market)
What are 3 reasons why Time Lags exist? (a limitation of Fiscal Policy)
- Formulation lag
- Information lag
- Implementation lag
___ are taxes and government spending that affect fiscal policy without specific action from policy-makers.
Automatic stabilizers
The ___ is the increase in consumer spending that occurs when spending by one person causes others to spend more too.
multiplier effect
Disposable Income?
Income left after people pay taxes on it
Consumption is based on ___
Disposable Income
The amount consumption increases when disposable income increases by $1 is called the ___
MPC
The ___ is the amount that GDP increases when government spending increases by $1
government-spending multiplier
Formula for Government Spending Multiplier?
1 / (1 - MPC)
The ___ is the amount that GDP decreases by when taxes increase by $1.
Taxation Multiplier
How does cutting taxes increase GDP?
Increases GDP indirectly through Consumption
Formula for Taxation Multiplier?
- MPC / (1 - MPC)
* that’s a negative sign infront of MPC ^^^
