Chapter 12: Fiscal Policy

what of the following has the same effects on equilibrium GDP demanded as a 1000 increase in government purchases?

-1000 increase in exports

if the MPC =.8 which of the following would cause the biggest change in real GDP?

-200 million increase in gov purchases -250 mullion increase in transfer payment -a 1 billion increase in government purchases and a 1 billion dollar increase in net taxes

Changes in Net Taxes

-a change in net taxes also affects the equilibrium quantity of real GDP demanded but in a less direct manner than does a change in government purchases -a reduction in net taxes increase disposable income, which generates an increase in consumption spending -a reduction in net taxes cause the consumption function to shift up by the same amount -the effect of a change in autonomous net taxes on equilibrium quantity of real GDP demanded is the shift in the consumption functions times the simple tax multiplier. that is, the change in Y = change in net taxes X [-MPC/(1-MPC)] -the total effect of changes in government purchases and autonomous taxes equals the sum of their individual effects -the absolute value of the multiplier is greater for a given change in government purchases than for an equal change in autonomous net taxes because the change in government purchases affects aggregate spending directly whereas changes in autonomous net taxes do not

Contractionary Fiscal Policy

-a decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation -fiscal policy used to close an expansionary gap

Expansionary Fiscal Policy

-an increase in government purchases, decrease in net taxes,or some combination of the two aimed at increasing aggregate demand enough to reduce unemployment and return the economy to its potential output -fiscal policy used to close a contractionary gap

Changes in Government Purchases

-an increase in government purchases, other things constant, increase equilibrium real GDP directly and by means of the multiplier -the multiplier for any change in autonomous government purchases (with taxes held constant) is the same as that for a change in investment spending: 1/(1-MPC)

( ) are changes in government purchases, transfer payments, or taxes that do not require discretionary action on the part of the government

-automatic stabilizers

( ) government purchases do not vary with the level of real GDP

-autonomous

taxes and transfer payments affect aggregate spending?

-by changing disposable income

an increase in autonomous net taxes causes the ( ) function to shift down

-consumption function

deliberate efforts to promote full employment through changes in government purchases, transfer payments, or taxes involves ( )

-discretionary fiscal policy

an increase in taxes may be an appropriate policy response in the face of an ( ) gap

-expansionary

Discretionary Fiscal Policy to Close a Contractionary Gap

-expansionary fiscal policy can be used to stimulate aggregate demand to move the economy to its potential GDP -an increase in government purchases or transfer payments or a reduction in taxes shifts the aggregate expenditure function -the increase output generally is accompanied by rising prices

( ) involves the various ways government can inflect GDP through changes in purchases, taxes, and transfer payments

-fiscal policy

Discretionary Fiscal Policy to Close an Expansionary Gap

-fiscal policy can be used to reduce aggregate demand when there is an expansionary gap -the chosen policy may be to increase taxes, to reduce government expenditures, to reduce transfer payment, or to use some combination of the three -with just the right reduction in aggregate demand, output falls to the potential output level and the price level drops to the expected price level

to close a contractionary gap, the government can increase ( )

-government purchases

( ) affect aggregate demand directly, ( ) and ( ) affect aggregate demand indirectly

-government purchases -taxes & transfer payments

what is assumed to be autonomous?

-government spending

the government purchases multiplier is ( ) than the multiplier associated with changes in transfer payments

-greater

what is expected to increase equilibrium GDP demanded?

-increase in government purchases of goods -reduction in taxes -increase in net exports -increase in transfer payments

an increase in government purchases ( ) through the economy, raising real GDP

-multiplies

the economy is producing its potential output and the government increase transfer payments, as a result?

-output increases in the short run, but fall bak to its original level in long run

because aggregate supply curve slopes upward, expansionary fiscal policy tend to be accompanied by?

-rising prices

the larger the time horizon,?

-smaller the impact of a change in fiscal policy

if economy is experiencing a contractionary gap, it might be appropriate for government to use fiscal policy to?

-stimulate aggregate demand

Automatic Stabilizers

-structural features of government spending and taxation that reduce fluctuations in disposable income, and thus consumption over the business cycle

an increase in gov spending would not affect the price level if?

-the SRAS is horizontal

an increase in autonomous taxes causes?

-the aggregate expenditure curve to shift down

Discretionary Fiscal Policy

-the deliberate manipulation of government purchases, taxation, and transfer payments to promote macro goals, such as fully employment, price stability, and economic growth

The Theory of Fiscal Policy

-the government affects the circular flow of income by collecting taxes, purchasing goods and services, and making transfer payments -fiscal policy involves the use of: government purchases, transfer payments, and taxes to influence aggregate output, employment, and the price level

the government is considering whether to increase spending by 1 billion or cutting taxes by 1 billion. what policy will have a bigger impact on the economy?

-the increase in spending because the spending multiplier is larger the net taxes multiplier

Simple Tax Multiplier

-the ratio of a change in real GDP demanded to the initial change in autonomous net taxes that brought it about -the numerical value of the simple tax multiplier is [-MPC/(1-MPC)]

The Multiplier and the Time Horizon

-the short-run aggregate supply curve slopes upward, so changes in the price level reduce the effect on output of any shift in aggregate demand. -the short run multiplier therefore is smaller than the multiplier when the price level is constant -if the economy is at its potential output, the long run spending multiplier is zero

Fiscal Policy Tools

-the tools of fiscal policy include automatic stabilizers and discretionary fiscal policy -a increase in government spending on transfer payments increases real GDP demanded

autonomous net taxes are taxes minus ( )

-transfer payments

suppose governemt purchases increase by 1 million and that business investment spending falls at the same time by 1 million. if the MPC is .8 the change in aggregate expenditure will be ?

-zerio

the long run multiplier when the economy is producing tis potential output is ( )

-zero

if the simple tax multiplier is 3.33, the government spending multiplier is?

4.33 ( 1 more than tax)

if the MPC is .9, the absolute value of the autonomous net taxes is?

9