Name: ________________________________________________________________________________
CHAPTER 34 - The Influence of Monetary and Fiscal Policy on Aggregate Demand Fiscal Policy and The Federal Budget
How Fiscal Policy Influences Aggregate Demand
Fiscal Policy
•
Fiscal Policy – the setting of _______________________________and _______________________________ by
government policymakers to ______________________________________________________________
•
Federal budget – a written document indicating the amount of money the government
_______________________________ (tax _____________________/____________________) and how
_______________________________________________ (expenditures)
–
•
Released the first Monday in _______________________________ each year
Fiscal year – 12 month period, ______________________________________________________________
Two Tools of Fiscal Policy
•
Taxation – increase or decrease _____________________________ of revenue from individual
________________________________ and ____________________________
•
Government Spending – increase or decrease in _____________________________________to affect
____________
Federal Spending
•
Mandatory Spending – programs that lawmakers are ___________________________________________to spend
money on (_______________________________, _______________________________,
_______________________________)
•
Discretionary Spending – spending that government can ________________________; increase or decrease
(_______________________________, environment, _______________________________, etc.)
How Fiscal Policy Influences Aggregate Demand
Expansionary vs. Contractionary Fiscal Policy
–
Expansionary Fiscal Policy - __________________________ spending, ___________ to
________________________ AD
–
Contractionary Fiscal Policy – __________________________ spending, _______________ to
_______________________________AD
Budget Deficits and the National Debt

•
Balanced budget – money going into the U.S. Treasury is the ____________________________________________
–
Revenue _____ Spending
–
The last balanced budget occurred in ____________under President ______________________________
Budget Surplus – occurs when the government ______________________________________________________
–
•
Revenue _____ Spending
Budget Deficit – occurs when the government ______________________________________________________
–
Revenue _____ Spending
Dealing with a Budget Deficit
•
Create money – the government can ______________________or ________________________________________
•
Borrow money – government borrows money by ________________________________
–
Bond is a type of loan with a ____________________________________________
–
Bonds sold ____________________________________________
–
China owns ______________________dollars in U.S. bonds
The National Debt
•
National debt – the total amount of money the federal government ______________________________________
•
•
Combination of all ____________________________ over time
Budget deficit – the amount of money the government owes to __________________________________________
Keynesian Economics
•
Keynesian economics - macroeconomic theory of ______________________________________________________
–
Laissez Faire (no government interference) in private sector can lead to _____________________________
_____________________________, namely unemployment and unused resources
–
Advocates ______________________________ responses by the ______________________________
(______________________ policy and ______________________ policy) to stabilize the
____________________________________
•
Advocates a ___________________________ economy, predominantly
____________________________________, but with a large role of ____________________________________
and public sector
•
Served as the economic model during the _____________________________________________, World War II,
and the ____________________________________ ______________________(1945–1973)
•
Lost influence until the global financial crisis in 2007, which caused a resurgence in Keynesian thought.
–
President George W. Bush was heavily ____________________________________ (except in 2007)
–
President Barack Obama, used Keynesian economics through ____________________________________
programs to attempt to assist the economic state.
Aggregate Supply and Demand
Classical, Keynesian, and NeoClassical Models
Multiplier Effect
•
Multiplier effect – additional shifts in _______ that result when ____________________________________
increases income, which leads to ____________________________________
•
Investment accelerator – increase demand leads to ____________________________________
–
Boeing example, pg. 787
Marginal Propensity to Consume (MPC)
•
Marginal Propensity to Consume (MPC) – fraction of ________________________ that a household
____________________________ rather than ___________________
•
–
¾ = household spends ________ and saves ________
–
½ = household spends ________ and saves ________
–
¼ = household spends ________ and saves ________
Investment accelerator – increase ___________________________ leads to _______________________________
Multiplier Formula
•
Multiplier = 1/(1 – MPC)
–
¾ MPC, MM = 1/(1-_____) = _______
–
Government spending is $20 billion
–
20 Billion x 4 = ___________________________
Crowding-Out Effect
•
Crowding-out effect – when ___________________________fiscal policy increases __________, which in turn
raises ___________________________
•
This “___________________________” potential ________________________________________ by firms
•
High interest rates are a ________________________ to borrowing
Changes in Taxes
•
Government __________________, or offers ________________________, increases households’
_____________________________________
–
Tax cuts shift AD to the ________________ because “_______” goes up
–
Multiplier effect can depend on the perception of tax ___________________________ (Bush Tax Cuts,
Payroll Tax Cut, Stimulus)
–
Raise taxes, decreases households’ ___________________________
–
Tax hikes shift AD to the _______________ because “_______” goes down
Active Stabilization Policy
•
Active policies by the _______________ and ___________________________________ to interrupt
________________________ trends in the ________________________
•
•
•
Respond to changes in ________________________to stabilize _____________
•
_______________________________________ to offset reduction in spending
•
Increased money supply lowers ________________________
Fed
Federal Government
•
________________________, ________________________
•
Increase ________________________
Automatic Stabilizers
•
Automatic Stabilizers –_____________________________, changes in ___________________________ policy that
___________________________ when economy goes into a ___________________________ w/out policymakers
having to take deliberate action
–
Tax system, recession __________________________________ collected
–
Government spending ___________________________ during recession
(___________________________, ___________________________, other cash transfers) automatically
stabilize the economy
Tools of Fiscal Policy Chart
Fiscal Policy
Expansionary/
Contractionary
Explanation (direct effect, component of
GDP, AD)
1. The government cuts business and
personal income taxes and increases its
own spending.
2. The government increases the
personal income, Social Security and
corporate income tax.
3. Government spending goes up while
taxes remain the same.
4. The government reduces the wages
of its employees while raising taxes on
consumers and businesses.
Scenario
1. National unemployment
rate rises to 12%
2. Inflation is strong at a rate
of 14% per year.
3. Surveys show consumers
are losing confidence in the
economy, retail sales are weak
and business inventories are
increasing rapidly
4. Business sales and
investment are expanding
rapidly, and economists think
strong inflation lies ahead.
5. The government eliminates
the deductibility of interest
expense for tax purposes
Expansionary/
Contractionary
Effect on
Federal
Budget
Objective
for
Aggregate
Demand
Action
on Taxes
Action on
Gov’t
Spending
Effect on
the
National
Debt