Exam 4 - Chapter 13 Fiscal policy the discretionary...

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Chapter 13 Fiscal policy – the discretionary changing of government expenditures or taxes to achieve national economic goals, such as high employment with price stability; the deliberate change in government spending, government borrowing or taxes to stimulate or slow down the economy. It contrasts with monetary policy, which describes the policies about the supply of money to the economy; Fiscal Policy and Monetary Policy are the macroeconomic tools that governments have at their disposal to manage the economy. Goals of Fiscal Policy – 1.high employment (low unemployment), 2. price stability, 3. economic growth, 4. improvement in the nation’s international payments balance If economy experiencing recessionary gap – the gov’t decides to spend more, which shifts the aggregate demand curve to the right and perhaps lead to a higher equilibrium level of real GDP per year (the dollar value of total spending must rise) If economy experiencing expansionary gap – a decrease in gov’t spending can shift the aggregate demand curve to the left, reducing the equilibrium level of real GDP per year to be consistent with LRAS Keynesian economics - an economic theory based on the ideas of 20th century British economist John Maynard Keynes. Keynesian economics promotes a mixed economy, where both the state and the private sector play an important role. Keynesianism economics comes in contrast to laissez-faire economics (economic theory based on the belief that markets and the private sector could operate well on their own, without state intervention). In Keynes's theory, general (macro- level) trends can overwhelm the micro-level behavior of individuals. Instead of the economic process being based on continuous improvements in potential output, as most classical economists had believed from the late 1700s on, Keynes asserted the importance of aggregate demand for goods as the driving factor of the economy, especially in periods of downturn. From this he argued that government policies could be used to promote demand at a macro level, to fight high unemployment and deflation of the sort seen during the 1930s Expansionary fiscal policy - defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded Crowding-out effect – the tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the private sector; this decrease
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This test prep was uploaded on 04/07/2008 for the course ECON 103 taught by Professor Downing during the Fall '06 term at Danville Area CC.

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Exam 4 - Chapter 13 Fiscal policy the discretionary...

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