Fiscal Policy
The two ways to fix a recessionary gap
Increase Gov. Spending & Decreased Taxes
The reason of why Automatic stabilizers kick in immediately
Non-Discretionary
Spending Multiplier Relative to Tax Multiplier (when calculating)
1 greater
Fiscal policy tool with indirect impact on AD
Tax Raises/Cuts
examples of automatic stabilizers that act as expansionary fiscal policy
Unemployment Insurance & Temporary Assistance
Formulas for Spending and Tax Multiplier
Spending: 1/MPS
Tax: -MPC/MPS
The two changed elements when AD decreases
Decrease in Employment and Inflation
Income/Corporate Taxes
Automatic Stabilizing agents as part of Contractionary Policy
How MPC and MPS impact multipliers
extra income leads to extra demands and/or spending and creates more income
most effective in raising real GDP to the full-employment level if wages are sticky
Increased Gov. Spending
Two other un-mentioned automatic stabilizers
the Supplemental Nutrition Assistance Program (SNAP) & Medicaid
amount you need to raise taxes by if government wants to increase its spending by $100 billion without increasing inflation in the short run
Raise them by more than $100 Billion
Graph drawing when there is an increase of the same amount in both Gov. Spending and tax increases
Rightward shift of AD (AD3)
Only time when transfer payments could count towards GDP
When used to purchase goods and services in economy (Part of Consumption in C+I+G+X)
The amount government would have to spending or cut taxes by if there is a recessionary gap of $12B when MPC = .75
Spending multiplier: 1/.25 = 4
Tax: -.75/.25 = -3
12/4 = spend 3 billion
12/-3 = cut by 4 billion