MacroEconomics 13.1 Discretionary Fiscal Policy
When there is ________ gap, the government would increase taxes in an attempt to shift the aggregate demand curve to the ________.
an inflationary; left
Suppose that Congress and the President decide that economic performance is weakening and that the government should "do something" about the situation. They make no tax changes but do enact new laws increasing government spending on a variety of programs. a. Prior to the congressional and presidential actions, careful studies by government economists indicated that the direct multiplier effect of a rise in government expenditures on equilibrium real GDP is equal to 6. In the 12 months since the increase in government spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount. This could have happened because of all the following except b. Another year and a half elapses following passage of the government spending boost. The government has undertaken no additional policy actions, nor have there been any other events of significance. Nevertheless, by the end of the second year, real GDP has returned to its original level, and the price level has increased sharply. This possibly happened because
a supply-side effect. the LRAS was vertical; the increase in government spending raised aggregate demand and resulted in only a rise in the price level in the long run.
You are a member of Congress. The economy is currently experiencing a recessionary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the economy?
An increase in government spending and a decrease in taxes.
Suppose that the economy is shown to the right. This economy is currently experiencing
B. a recessionary gap. Draw AD1 shifted to the right of AD.
Fiscal policy refers to When an economist is using the term "discretionary" as in discretionary spending, they are referring to the
discretionary changes in government spending and taxes. amount of government spending decided upon by Congress or the government's ruling body.