Random
If the inflation rate is high what policy might the gov't implement?
Contractionary policy
What is fiscal policy
The federal government's use of taxation and spending policies to increase or decrease aggregate demand.
What is the name of the tax that is considered undesirable or harmful?
Sin tax
What is the formula for the government and investment spending multiplier?
1/MPS
What does MPC stand for & what does it do?
Marginal Propensity to consume helps evaluate how fiscal policy can be implemented effectively because it shows how much people will spend each dollar they receive.
What is crowding out?
When expansionary fiscal policy counteracts itself and causes higher interest rates that discourage spending and don't pursue expansionary policies effectively.
Expansionary and contractionary fiscal policy
What is the name of the tax that increases with income?
Progressive tax
What is the tax multiplier formula?
-MPC/MPS
What does MPS stand for?
Marginal propensity to save
Explain the goal for economic growth?
Increasing real GDP at a rate of 3% or more each year
What is an example of fiscal policy trade-offs?
Increasing national debt, federal budget deficit, and inflation
What is it called when expenses exceed income?
Budget deficit
What do multipliers measure?
Calculates the total effect of a change in investment, gov't spending or taxes on GDP
What is the formula for calculating MPC?
Change in consumption/change in disposable income
Who implements stabilization policies?
The President or Congress
What fiscal policy occurs when Congress creates a new bill that is designed to change AD through government spending or taxation?
Discretionary fiscal policy
What is it called when income exceeds expenditure?
Budget surplus
What is the definition of tax multiplier?
Number that helps calculate the total effect of change in taxes on GDP
If the MPC is .8 what is the MPS?
.2
How does the government spend money it doesn't have? What happens from that?
Government borrows money and that leads to debt
If the government wanted to directly increase consumption, what should they do?
Implement demand-side policies
What is the word for the net accumulation of the federal government's annual budget deficit?
National debt
Income increases from 2,000 to 3,000 and consumption increases from $2,001 to $2,750 calculate the MPC and MPS. Using the MPC and MPA from above, calculate the gov't spending multiplier and the tax multiplier.
MPC: 749/1000=.75 (change in consumption/change in disposable income)
MPS: .25(change in savings/change in disposable income)
gov't spending multiplier: 1/.25=4 (1/MPS)
Tax multiplier: -.75/.25=-3 (-MPC/MPS)
If you spent $300 and your income is $500 what is the MPS?
.40
~(300/500=.60)
.60 + MPS=1
MPS= .40