1. Fiscal
    • use of taxes,
    • government transfers, or government purchases of goods and services to shift
    • the aggregate demand curve.

  2. Expansionary
    fiscal policy

    • increases aggregate
    • demand and

    • Can
    • Close a Recessionary Gap

  3. Contractionary
    Fiscal Policy
    • Eliminate

    • an Inflationary Gap and

    • reduces aggregate
    • demand.

  4. A Cautionary Note: Lags
    in Fiscal Policy

    true because it all takes time

  5. multiplier on changes in government purchases
    • 1/(1 − MPC)

  6. multiplier on changes in taxes or transfers
    • MPC/(1 − MPC) and are less effective because part is absorbed into savings

  7. Lump-sum
    • taxes that don’t
    • depend on the taxpayer’s income

  8. automatic stabilizers
    • reducing the size of the multiplier and
    • automatically reducing the size of fluctuations in the business cycle and include taxes and transfers

  9. cyclically adjusted budget
    • separate the effects of the business cycle
    • from the effects of discretionary fiscal policy, governments estimate

  10. budget deficit as a
    percentage of GDP tends to rise during recessions


  11. budget deficit as a
    percentage of GDP moves closely in tandem with the unemployment rate.


  12. fiscal year
    • from October 1 to September 30

  13. Implicit liabilities

    • §spending promises made by
    • governments that are effectively a debt despite the fact that they are not
    • included in the usual debt statistics.

  14. aggregate demand
    • consumers and firms
    • become more optimistic,

    • the real value of
    • household assets rises,

    • existing stock of
    • physical capital is relatively small,

    • government increases
    • spending or cuts taxes, or

    • increases the
    • quantity of money

  15. movement along the AD curve
    • occurs when a change in the aggregate price
    • level changes the purchasing power of consumers’ existing wealth

  16. short-run aggregate supply
    is upward-sloping
    • because nominal wages are sticky in the short
    • run:

  17. nominal wage
    • dollar amount of the wage paid.

  18. Sticky wages
    • nominal wages that are slow to fall even in
    • the face of high unemployment and slow to rise even in the face of labor
    • shortages

  19. short-run aggregate
    supply increases
    • commodity prices fall,

    • If nominal wages fall,

    • If workers become
    • more productive

  20. long-run aggregate supply
    • , including nominal wages, were fully
    • flexible.

  21. a recessionary gap
    • aggregate output is below potential output.

  22. output gap
    • percentage difference between actual
    • aggregate output and potential output.
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