Fiscal Policy Tools
What are the tools for fiscal policy?
Government Expenditures and Taxes
What are the components of aggregate demand?
Consumer expenditure, Investment, Government spending, and net exports
How does expansionary fiscal policy effect the budget?
It causes a budget deficit
What is the Keynesian solution to a recession?
Increased government spending and lower taxes
What is the formula for the spending multiplier?
MS = 1/mps
What are the two types of fiscal policy?
Expansionary policy and Contractionary policy
What are the components of aggregate supply
Resource prices, resource productivity, and government regulations.
How does contractionary fiscal policy affect the budget?
It causes a budget surplus
What is the classical solution to a recession?
What is the two formulas for the tax multiplier?
Increasing taxes : -mpc/mps
Decreasing taxes: mpc/mps
What are the automatic stabilizers
Taxes, welfare payments and unemployment benefits
What causes a shift in long run aggregate supply(LRAS)
More investment and/or a change in production technoloy
What is it called when both government spending and taxes increase by the same amount?
Balanced Budget Expansion
What is the Keynesian solution to aggregate supply shifting to the left?
More government subsidies and less regulations.
What is the balanced budget multiplier?
The balanced budget multiplier is always equal to 1
What is the benefit of automatic transfer payments?
Automatic transfer payments add a level of stability to the economy
What causes aggregate demand to be downward sloping?
What is an effect of the government increasing expenditures?
The Crowding out effect
What is the classical solution to aggregate supply shifting to the left?
Waiting it out
What is the formula for mps?
MPS = Change in saving/change in disposable income
What are three 3 things that fiscal policy affects in the economy?
Price level, real GDP, unemployment
Why is aggregate supply upward sloping?
Prices and wages are not flexible
How does an appreciated exchange rate affect aggregate demand?
An appreciated exchange rate allows for more imports, which decrease both net exports and aggregate demand
What is the main criticism of Classical Solutions?
It would take too long for the economy to fix itself
Which multiplier has the greater effect, government spending or tax?
The government spending multiplier has the greater effect