Fiscal Policy

Question 1

Fiscal vs Monetary Policy

Answer 1

• Fiscal: Changing tax rates and levels of Gov’t spending to influence AD in economy (tax & spending of Federal Gov’t)
• Monetary: Changing interest rate and influencing money supply.

Question 2

Tax Multiplier

Answer 2

-c/(1-c)

Question 3

Fiscal Multiplier

Answer 3

1/(1-c)

Question 4

MPC

Answer 4

Marginal Propensity to Consume (c): The metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers).

Question 5

Crowding Out

Answer 5

Situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending

Question 6

Ricardian Equivalence

Answer 6

When a government tries to stimulate demand by increasing debt-financed government spending, demand remains unchanged. This is because the public will save its excess money in order to pay for future tax increases that will be initiated to pay off the debt.