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Econ Chapter 11

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