FISCAL POLICY NOTES Flashcards
What does the term “fiscal” mean?
Anything related to government revenue spending and debt.
What is the fiscal policy?
The federal governments use of taxes and government spending to affect the economy.
What are the two goals of the fiscal policy?
- To increase aggregate demand.
- To fight inflation.
When will the government use expansionary fiscal policy and what is its plan?
When the economy slows the government uses it to increase aggregate demand and stimulate a weak economy.
When is a contractionary fiscal policy used and what is it’s plan?
When the economy is in an inflationary period they use it to reduce aggregate demand and slow the economy in a period of too-rapid expansion.
What is expansionary policy designed to do?
It’s designed to stimulate a weak economy to grow.
What is contractionary fiscal policy used to do?
It’s used to slow the economy down in order to control inflation.
In expansionary fiscal policy,does the government want to increase or decrease aggregate demand?
Increase. So that growth occurs in the economy.
What taxes might be lowered in expansionary fiscal policy?
Lowering individual and corporate income taxes to help stimulate the economy.
In contractionary fiscal policy, does the government want to increase or decrease aggregate demand?
Decrease the level of aggregate demand.
What is it called when the economy is growing too rapidly and aggregate demand is increasing faster than supply?
Leads to demand pull inflation.
What is the first limitation of the fiscal policy?
Policy lags:
- Lags (delayed) behind economic issues.
- Takes congress months to decide on how to implement fiscal policy.
What is the second limitation of the fiscal policy?
Political Issues:
- The president may not follow the advice of the Council of Economic Advisors due to the reelection concerns.
- Raises Taxes
Presidents that are unwilling to use fiscal policy that would be unpopular with voters.
