Download Chapter 12: Fiscal Policy

The Nickling’s Guide to Fiscal Policy (Day One)
By: Nicholsons in Black
Stabilization Policy
 Stabilization policy is a government policy designed to lessen the
effects of the ______________. It can be either ____________ or
_______________.
o
o
Expansionary policy attempts to __________ unemployment and
stimulate output.
Contractionary policy attempts to ___________ prices and reduce
output.
 Stabilization policy can take the form of either _____________ or
_________________.
o
o
o
o
Fiscal policy uses _______________ and ____________________.
Expansionary fiscal policy involves ____________ government
purchases and/or ______________ taxes to shift AD rightward.
Contractionary fiscal policy involves __________ government
purchases and/or _______________ taxes to shift AD leftward.
Monetary policy uses interest rates and the money supply.
 Discretionary policy is ______________ government intervention in the
economy.
 Automatic stabilizers are built-in measures such as _________ and
_____________________ to lessen the effects of the business cycle.
Benefits and Drawbacks to Fiscal Policy
 Fiscal policy has two main benefits:
o It can be focused on particular _____________.
o It has a relatively ___________ impact on spending.
 Fiscal policy has two main drawbacks
o It is subject to delays: ____________, ____________,
_____________.
It is closely related to public ____________.
Nickling’s Road to Success in Understanding Fiscal Policies:
 In the following cases, would policy-makers raise to reduce government
purchases? Why?
o Real output is less than potential level. ________________
o Unemployment is below its natural rate.
________________
o Real output equals its potential level and unemployment is at its
natural rate.
________________
 Explain how automatic stabilizers work during the following periods.
o The economy is experiencing a recession, with shrinking incomes
and spending.
________________
o The economy is in an expansionary phase, with rising incomes and
spending.
________________
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The Nickling’s Guide to Fiscal Policy (Day One)
By: Nicholsons in Black
The Multiplier Effect
 The ________________ is the magnified impact of a spending change on
AD.
o
o
o
o
o
An initial spending change produces ___________ and part of this
new income becomes new spending.
This process is repeated with each spending round _________ than
the last.
Each new spending round is determined by the ______________
______________________ (MPC) which measures the effect of an
income change on domestic consumption.
Each new spending round is also determined by the _________
______________________ (MPW) which measures the effect of an
income change on withdrawals.
MPC and MPW always summing to one.
The spending multiplier:
 The value by which an initial spending change is __________ to give
the total shift in the AD curve.
 Equals (_____/MPW).
 The actual change in equilibrium output is _______ than the change in
AD found using the spending multiplier because of __________________.
Nickling’s Road to Success in Understanding Fiscal Policies:
A. If an economy is initially in equilibrium and injections rise by $1
million, then by how much will withdrawals have to rise in order to
bring injections and withdrawals back in balance?
________________________________________________________________
B. If the economy’s MPW is 0.67 then by how much will incomes and output
have to rise to create the required additional expenditures?
________________________________________________________________
C. Explain how your answer to part B. is based on the formula for the
spending multiplier.
________________________________________________________________
 For each of the following cases, calculate the spending multiplier and
state the direction and size of the shift in the AD curve.
o Government purchases fall by $10 billion in an economy with an
MPW of 0.60.
_________________
o A tax cut causes an initial $25 billion rise in spending in an
economy with an MPW of 0.80.
_________________
o Government purchases rise by $15 billion in an economy with an
MPC of 0.25.
_________________
o A $30 billion tax rise occurs in an economy with an MPC of 0.45.
_________________
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The Nickling’s Guide to Fiscal Policy (Day One)
By: Nicholsons in Black
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