business cycles - Assignment 5 Chapter 5 Section 1 Growth...

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Assignment 5 Chapter 5: Section 1: Growth of Real GDP & Business Cycles Chapter 12: Government & Fiscal Policy 12.2: The Use of Fiscal Policy to Stabilize the Economy Fiscal Policy = the use of gov’t expenditures & taxes to influence the level of economic activity Used to close recessionary/inflationary gaps Some tax expenditure programs change automatically with the level of economic activity Automatic Stabilizer – any gov’t program that tends to reduce fluctuations in GDP automatically Increase GDP when it’s falling & reduce GDP when it’s rising Gov’t can reduce the drop in real GDP & protect individuals from impact of shocks in economy with: o Transfer payments (as income falls, more ppl are eligible for income supplements reduces change in real GDP) o Income taxes bcs they fall as incomes fall (disposable income remains somewhat unaffected) o Unemployment benefits Go into effect as soon as income starts to change. Affect disposable personal income affect consumption affect real GDP
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