Fiscal policy Flashcards
Fiscal Policy def + purpose
use of G spending & taxes to influence
-output
-employment
-inflation
Discretionary fiscal policy def + purpose
Deliberate changes in G spending & taxes to change AD
-Stabilise the economy
Expansionary fiscal policy
-Cutting taxes &/or
-Increase G spending
Contractionary fiscal policy + purpose
-Increase taxes &/or
-Decrease G spending
Purpose: decrease AD to combat inflation
Contractionary fiscal policy + purpose
-Increase taxes &/or
-Decrease spending
Purpose: decrease AD to combat inflation
Consequences of increase in G spending -> AD curve ->price levels and real GDP (Expansionary fiscal policy)
increase in G spending -> Increase AD curve -> Increase price levels and real GDP
Consequences of decrease in G spending -> AD curve ->price levels and real GDP (Contractionary fiscal policy)
decrease G spending -> decrease AD curve -> decrease price levels and real GDP
Spending multiplier def
Change in AD due to change in any expenditure (C, I, G, Net exports)
Marginal Propensity to consume def
Change in AD due to change in income
Tax multiplier def
Change in AD due to taxes
Is tax cut or government spending better to combat recession
tax cut has a smaller multiplier on AD than an equal increase in G spending
Automatic stabilisers/ Non-discretionary fiscal policy def (2)
-Federal expenditures
-Tax revenues
that change levels in order to stabilise economy
Budget Surplus def
Budget in which G revenues >G spending in a given time period
Budget Deficit def
Budget in which G revenues < G spending in a given time period
Consequence of increase in real GDP -> taxes -> G Budget
Taxes rise -> Budget surplus offsets inflation
