LaytonEco2ePP_Ch17 - Chapter 17 Macroeconomic policy II:...

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1 Chapter 17 Macroeconomic policy II: fiscal policy
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2 Key concepts What is a discretionary fiscal policy? How can fiscal policy be used to modify the  level of economic activity? What is the spending multiplier? What is the balanced budget multiplier? What are automatic stabilisers? What is the role of the federal budget?
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3 Discretionary fiscal policy Discretionary fiscal policy is the deliberate  use of changes in government spending or  taxes to alter aggregate demand and stabilise  the economy. The government can increase  AD  by  expansionary  fiscal policy. The government can reduce  AD  by  contractionary  fiscal policy.
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4 Examples of  expansionary fiscal policy An increase in government spending A decrease in taxes An increase in government spending and  taxes equally.
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5 Examples of  contractionary fiscal policy A decrease in government spending An increase in taxes A decrease in government spending and  taxes equally.
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6 Discretionary fiscal policy
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7 Government spending to combat  recession Policy makers could either do nothing but wait  for the trade cycle to expand, or they could  increase government spending . This expansionary policy would: Increase the aggregate demand curve Increase real GDP Raise the price level.
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8 Government spending to combat  recession (cont.)
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How much spending is required? Initial spending by the government is amplified,  as the  spending multiplier  occurs: Those receiving the money spend some of it  on goods and services – this creates a ripple  effect The  proportion  they spend depends on the  marginal propensity to consume  (MPC). We can use this to calculate the spending 
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This note was uploaded on 09/06/2009 for the course MGMT econ taught by Professor Galinaivanova during the Spring '09 term at University of Central Arkansas.

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LaytonEco2ePP_Ch17 - Chapter 17 Macroeconomic policy II:...

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