TAILIEUCHUNG - Lecture Economics - Chapter 21: Fiscal policy

In this chapter, you will learn to: Can Congress fight a recession without taking any action? Why did Ronald Reagan think the federal government could increase tax revenues by cutting taxes? Is an increase in government spending or a tax cut of equal amount the greater stimulus to economic growth?,. | Chapter 21 Fiscal Policy Key Concepts Summary Practice Quiz Internet Exercises ©2000 South-Western College Publishing * In this chapter, you will learn to solve these economic puzzles: Is an increase in government spending or a tax cut of equal amount the greater stimulus to economic growth? Can Congress fight a recession without taking any action? Why did Ronald Reagan think the federal government could increase tax revenues by cutting taxes? * What is a Discretionary Fiscal Policy? The deliberate use of changes in government spending or taxes to alter aggregate demand and stabilize the economy * What are examples of Expansionary Fiscal Policy? Increase government spending Decrease taxes increase government spending and taxes equally * What are examples of Contractionary Fiscal Policy? Decrease government spending Increase taxes Decrease government spending and taxes equally * $6 $ $ AS 0 150 155 Full Employment AD1 AD2 Real GDP Price Level E2 X E1 155 Government Spending to Combat a Recession * Increase in government spending Increase in the aggregate demand curve Increase in the price level and the real GDP * With an MPC of , what is the Spending Multiplier? 1/1-MPC = 1/ = 1/25/100 = 1 / = 4 * How much will real GDP increase by with an increase in government spending of $50 bil? 4 x $50 bil = $200 bil * What is the Tax Multiplier? The change in aggregate demand (total spending) resulting from an initial change in taxes * What happens when government cuts taxes by $50 bil? The multiplier process is less because initial spending increases only by $38 bil instead of $50 bil * What is the formula for the Tax Multiplier? 1 – spending multiplier * How much does real GDP increase by with a cut in taxes of $50 bil? 3 x $50 bil = $150 bil * Can we assume that the MPC will remain fixed? No, it can change from one time period to another * Can Fiscal Policy be used to combat Inflation? Yes, this .

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