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Fiscal Policy
The making of deliberate, discretionary changes in federal government expenditures or taxes to achieve certain national economic goals
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When the government spends more, the dollar value of total spending initially must rise
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Expansionary Fiscal Policy
When Government spends more
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Expansionary Fiscal Policy leads to
aggregate demand curve shifting to the right
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The spending decisions of firms, individuals, and other countries' residents depend on the taxes levied on them
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Increase in taxes leads to what concerning the Aggregate Demand
reduction in AD (Leftward Shift)
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Crowding Out Effect
a rise in government spending, holding taxes constant, tends to crowd out private spending, dampening the positive effect of increased government spending on aggregate demand
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Crowding out dilutes the effect of expansionary fiscal policy
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Ricardian Equivalence Theory
- proposition that an increase in the gov budget deficit has no effect on aggregate demand
- this is because people will save money for future taxes
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Direct Expenditure Offsets
private sector spends causing the offset of the government fiscal policy. any increase in government spending in an area that competes with the private sector will have some DE offset
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Supply Side Economics
The suggestion that creating incentives for individuals and firms to increase productivity will cause the aggregate supply curve to shift outward
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recognition time lag
The time required to gather info about the current state of the economy
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Action time lag
time between recognition of a problem and the implementation of policy to solve it
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effect time lag
after fiscal policy is enacted, it takes time for the policy to affect the economy
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automatic stabilizers
- tax system
- unemployment compensation
- income transfer payments
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Fiscal Policy is more effective in abnormal times. (Great depression and wars)
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