Macro Economics Chapter 11 Power Point Flashcards
What is a discretionary fiscal policy?
The deliberate use of changes in government spending or taxes to alter aggregate demand
What are examples of expansionary fiscal policy?
•Increase government spending•Decrease taxes•Increase government spending and taxes equally
An Increase in government spending leads to an Increase in the __________ _________ curve. Than an increase in the ________ _______ and the _____ ____.
aggregate demandprice levelreal GDP
What is the spending multiplier?
Any initial change in spending leads to a chain reaction of more spending which causes a greater change in demand.
How is the spending multiplier calculated?
The ratio of the change in real GDP to an initial change in aggregate expenditure.
What is marginal propensity to consume?
MPC is the change in consumption resulting from a change in income.
What is marginal propensity to save?
MPS is the change in saving resulting from a change in income.
If MPC is 0.75, what is MPS?
.25
With an MPC of 0.75, what is the spending multiplier?
1/MPS = 1/1/4 = 4
How much will real GDP increase with an increase in government spending of $50 billion?
4 x $50B = $200B
What is the tax multiplier?
The change in aggregate demand (total spending) resulting from an initial change in taxes.
What happens when government cuts taxes by $50 billion?
The multiplier process is less because initial spending increases only by $38B instead of $50B
What is the conclusion?A tax cut has a _________ multiplier effect on _________ _________than an equal increase in __________ __________..
- smaller- aggregate demand - government spending
What is the formula for the tax multiplier?
1 – spending multiplier
With a spending multiplier of 4 what is the tax multiplier?
1 – spending multiplier = – 3
How much does real GDP increase by with a cut in taxes of $50B?
3 x $50B = $150B
Can we assume that the MPC will remain fixed?
No, it can change from one time period to another
Can fiscal policy be used to combat inflation?
Yes, this would happen when the economy is operating in the intermediate range of the aggregate supply curve.
A decrease in government spending or increase in taxes leads to decrease in the ________ _______ curve and a decrease in the _______ _______.
- aggregate demand - price level
What will happen to AD with a cut in G spending of $25B? (Spending Multiplier of 4)
−$25B x 4 = −$100B
What will happen to AD with a cut in taxes of $33.3B? (Spending Multiplier of 4)
$33.3B x −3 = −$100B
What is the balanced budget multiplier?
An equal change in government spending and taxes will change aggregate demand by the amount of the change in government spending.
What is an automatic stabilizer?
Federal expenditures and tax revenues that automatically change levels in order to stabilize an economic expansion or contraction.
What are examples of automatic stabilizers?
•Transfer payments•Unemployment compensation•Welfare
What is a budget surplus?
A budget in which government revenues exceed government expenditures in a given time period.
What is a budget deficit?
A budget in which government expenditures exceed government revenues in a given time period.
Increase in real GDP leads to a tax collection _____ and government transfer payments _____. Budget surplus offsets _______.
- rise- fall- inflation
Decrease in real GDP leads to a tax collection _____ and government transfer payments _____. Budget deficit offsets _______.
- falls- rise- recession
What is supply-side fiscal policy?
A fiscal policy that emphasizes government policies that increase aggregate supply.
What is the purpose of supply-side fiscal policies?
To achieve long-run growth in real output, full employment, and a lower price level.
Increase in government spending leads to a __________ in net taxes and an ___________ in the aggregate demand curve.
- decrease - Increase
A decrease in resource prices; technological advances; subsidies; decrease in regulations, leads to an Increase in the _________ _______ _________.
aggregate supply curve
What is the Laffer Curve?
Puts forth the idea that increasing taxes from zero will increase tax revenues up to a certain point.
Will an increase in taxes lead to higher government revenues?
That depends on where the economy is on the Laffer Curve.
What happens if taxes increase beyond a certain point?
Tax revenues begin to decline as the economic pie begins to shrink.
Why does the economic pie begin to shrink?
Workers have less incentive to work and investors have less of an incentive to invest as their taxes increase beyond a certain level.
