Fiscal Policy Flashcards
1
Q
Which 2 components of AE does government spending affect?
A
G+T
2
Q
Fiscal policy mechanism
A
Changed fiscal policy affects AE
AE affects GDP, PL and AD
3
Q
Why is the tax multiplier less than the expenditure multiplier?
A
Part of the increased Y is saved dependent on savings ratio
4
Q
Tax multiplier=
A
MPC/ 1-MPC(1-t) - m
5
Q
balanced budget multiplier
A
expenditure multiplier-tax multiplier
6
Q
3 limitations of fiscal policy
A
Lag time
Crowding out
Difficulty estimating GDP
7
Q
3 stages of crowding out
A
G rises causing AE, AD and GDP to rise
MD therefore increases
This puts upward pressure on IR
