Macroeconomics Unit 2:  Fiscal Policy

 

Key Concepts and Questions:

*     What are the basic differences between the Classical and Keynesian views of the macroeconomy?

*     One person's expenditure becomes another person's income.

*     A change in spending leads to an even greater change in income.

*     The government can use its ability to tax, spend, and legislate to manipulate aggregate demand.

*     Tax changes and spending changes of equal magnitude have unequal effects on national income.   

 

Terms and Topics:

Ø       Savings 

Ø       Dis-savings

Ø       Equilibrium   

Ø       Full employment income

Ø       Inflationary gap    

Ø       Recessionary gap

Ø       Spending becomes income   

Ø       Aggregate expenditures = C+I+G+X

Ø       Disposable personal income (DPI)

Ø       Average propensity to save

Ø       Average propensity to consume   

Ø       Investment spending

Ø       Expected rate of net profit     

Ø       Real interest rate

Ø       The multiplier effect     

Ø       Determination of the multiplier

Ø       Marginal propensity to save (MPS)     

Ø       Marginal propensity to consume (MPC)

Ø       Economic Philosophies

Ø       Keynesian Cross / 45o Line Model / Aggregate Expenditures Model

Ø       Income/savings/consumption relationship     

Ø       Net exports

Ø       Excess capacity     

Ø       Limitations of Keynesian Cross

Ø       Equilibrium view    

Ø       Disequilibrium view

Ø       Adam Smith    

Ø       Classical Model

Ø       Keynesian model     

Ø       Economic equilibrium

Ø       Wage price flexibility    

Ø       Savings / investment / interest rates

Ø       Government involvement?   

Ø       Shape of aggregate supply

Ø       Stability of aggregate demand   

Ø       Reasons for savings

Ø       Say's Law     

Ø       Great Depression

Ø       Leakages (S+T+M)    

Ø       Injections (I+G+F)

Ø       Nominal wages 

Ø       Real wages

Ø       Laissez faire

Ø       Fiscal Policy

Ø       Define Employment Act of 1946   

Ø       Economic indicators

Ø       National economic goals   

Ø       Tools of fiscal policy

Ø       Discretionary stabilizers 

Ø       Automatic stabilizers

Ø       Expansionary policy 

Ø       Contractionary policy

Ø       Deficit spending    

Ø       Budget surplus

Ø       Balanced budget multiplier

Ø       Time lags in fiscal policy

- Recognition

- Administration

- Operational

Ø       How to finance deficit spending       

Ø       Political business cycle        

Ø       Fiscal policy and AS/AD model         

Ø       Crowding out  

Ø       Crowding in

Ø       Net export effect   

Ø       Countercyclical policies

Ø       Limitations of fiscal policy    

Ø       How is fiscal policy used today?