Econ Chapter 11 – Flashcards
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Fiscal Policy
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the use of the government budget to stabilize the economy(reduce unemployment or inflation) and to promote economic growth
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Discretionary Fiscal Policy
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the deliberate use of changes in government spending or taxes. it involves a change in a spending program or in a tax law
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Contractionary Fiscal Policy
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-DECREASE in government spending -INCREASE in taxes -LEFTWARD SHIFT
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Expansionary Fiscal Policy
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-INCREASE in government spending -DECREASE in taxes -RIGHTWARD SHIFT
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In the _____ range of the aggregate supply curve, expansionary fiscal policy causes aggregate ____ to increase , which results in a higher price level and a higher equilibrium level of real GDP
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intermediate, demand
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Equal increases in government spending and taxes will
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lead to an equal INCREASE in the equilibrium level of real GDP
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When the economy enters a recession, automatic stabilizers create
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budget deficits
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Automatic stabilizers "lean against the prevailing wind" of the business cycle because
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federal expenditures and tax revenues change as the level of real GDP changes
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Unemployment compensation payments
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rise during a recession and thus REDUCE the severity of the recession
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According to supply-side fiscal policy, reducing tax rates on wages and profits will
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reduce both unemployment and inflation
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Beginning at equilibrium E1 in Exhibit 11, when the govt increases spending or cuts taxes, the economy will experience
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demand-pull inflation
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In Exhibit 13, supply siders claimed that the shift from AS1 to AS2 would occur if the govt
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DECREASED tax rates and DECREASED the amount of govt regulations
