Macroeconomics Final Exam Review

Topics: Monetary policy, Inflation, Central bank Pages: 15 (4387 words) Published: August 31, 2013
Chapter 13 Fiscal Policy
* Government funds many programs through tax revenues
* Government transfers- payments by the government to households for which no good or service is provided in return * Social insurance programs- gov. programs (transfer payments) intended to protect families against economic hardship * Social security

* Medicare
* Medicaid
* Gov. purchases- national defense and education are the biggest categories * Gov. transfers- social security, Medicare and Medicaid are the biggest programs * GDP= C + I + G+ X – IM

* Gov directly controls its spending or G, and indirectly affects Consumer spending and Investment spending…how? * Household incomes are affected by taxes and transfers, and business investment is affected by taxes and regulations * Gov. can shift AD curve

* Fiscal Policy- the use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve * Expansionary fiscal policy- fiscal policy that increases aggregate demand * An increase in gov. purchases of goods and services * A cut in taxes

* An increase in government transfers
* Can close a recessionary gap, by stimulating the AD curve and move the economy back toward long run equilibrium * Contractionary fiscal policy- fiscal policy that decreases aggregate demand * A reduction in gov. purchases of goods and services * An increase in taxes

* A reduction in government transfers
* Can close an inflationary gap, can move the AD curve back toward long run equilibrium * Reasons for caution- significant lags in its use, its takes time to… * Realize the recessionary or inflationary gap by analyzing data * Develop a plan

* Implement the action plan (spending the money)
* The American Recovery and Reinvestment Act of 2009
* One effect was a sharp drop in revenues at the state and local levels, which in turn forced these lower levels of government to cut spending. Federal aid was sent mitigate these cut * The multiplier effects of an increase in government purchases of goods and services- * Ex: if mpc=.5, the muiltiplier would be 2, so 50billion of new government spending would create 100 billion in real gdp * Will a $50 billion tax cut or increase in transfers have the same effect as a $50 billion increase in government purchases? * No. people save %50 of their extra income, so the same size tax or transfer policy is smaller from the outset * The size of the shift of the aggregate demand curve depends on the type of fiscal policy * Changes in government purchases have a more powerful effect on the economy than equal sized changes in taxes or transfers * Its more complicated because we use simple…. * Lump sum taxes- taxes that don’t depend on the taxpayers income * Types of fiscal policy

* Automatic stabilizers- government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically Contractionary when the economy expands (unemployment insurance) * Discretionary fiscal policy- arises from deliberate actions by policy makers rather than rules (the Obama stimulus) * The budget balance measures fiscal policy

* Sgovernment= T- G – TR
* Government saving (surplus)= tax revenues (t)- government purchases (G) and transfers (TR) * Budget surplus- a positive budget balance
* Budget deficit- a negative budget balance
* Discretionary expansionary fiscal policies reduce the budget balance for that year * Discretionary Contractionary fiscal policies increase the budget balance for that year * To separate the effects of the...
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