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CHAPTER 12 FISCAL POLICY
DAY 1
They are government stabilization policies that _______________________ as its tools;
budgetary policy
Governments use stabilization policies to lessen the _________ effects in the business
cycle, mainly _______________ and_____________
The goal is to keep the economy as close as possible to its ________________ so that
only _______________ exists and inflation is restrained
When the economy’s total output is below the potential output the government uses
____________________.
When the economy is booming policy makers cut the inflation gap and bring the
economy back down to its potential output, government uses
__________________________
Governments can affect spending and output levels in an economy through taxation, and
government purchases this is called ________________
12 month period which the budget applies is called ____________
Fiscal policy is also known as ______________ which is intentional government
intervention in the economy
___________, __________________ and ____________ are injections
Income _____________, saving, taxes and __________are withdrawals.
When expansionary fiscal policies are in effect, injections rise and total flow increases
Contractionary fiscal policies, withdrawals increases and total flow__________
Fiscal policy is also known as _____________ policy which is intentional government
intervention in the economy
Taxation, transfer payment programs, employment insurance and welfare payments act as
_________________________
Multiplier Effect:
The Multiplier Effect is the
impact of any spending change on aggregate
demand. It is the change in spending at
price level, multiplied by a certain value to
give the resulting change in
demand.
Marginal Propensity to Consumers:
Marginal Propensity to consumers ( ) is the effect on domestic consumption of a
change in incomes and applies to individual ______ and the _____. MPC can be defined
as the change in consumption on domestic products as a proportion of the change in
income.
Formula = MPC = change in consumption on domestic items
Change in incomes
Marginal Propensity to Withdraw:
Not all income is spending, and what is may not be spent on domestic products. As a
result, some income doesn’t reappear in the circular flow. So there are three types of
withdrawals, they include saving, imports, and taxes.
So Marginal Propensity to withdraw (___) is the effect of the change in income on
_________. It can be defined as the change in total withdrawals as a proportion of the
change in income.
Formula = MPW = change in total withdrawals
Change in income
Injections and Withdrawals:
Before the expansionary fiscal policy, the economy had both injections and withdrawals
at equal. As a result of the governments’ discretionary policy, its $1000 planned increase
in government purchases which causes total injections to exceed total withdraws, causing
the output to rise. In each round spending in the circular flow, withdrawals increase. This
then continues until withdrawals are equal to the initial discretionary injection. At this
point injections and withdrawals are higher than they were before government purchases
were increased.
The Spending Multiplier:
The Spending Multiplier is the value by which the initial spending change is multiplied to
give the total change in ______. (To calculate shift in AD curve)
Total Change in Output (shift in AD curve) = (initial change in spending) x (spending
multiplier)
Effect of a Tax Cut:
The multiplier effect can be applied to other stimulus that government uses, such as tax
cuts. Tax cuts can be used to expand the economy. Lowering them leaves households and
businesses with more funds to spend and invest. The initial spending change in spending
on domestic items that result from a change in taxes (T) is found by multiplying the
economy’s MPC by the size of the tax change, and then this product is then multiplied by
the economies spending multiplier (1/MPW) to get the overall shift of the AD curve.
Total Change in Output (shift in ___ curve) = (initial change in spending) x (spending
multiplier)
$1000 = - (MPC x Change in T) x 1
MPW
$1000 = - (0.5 x 1000) x 1
0.5
$1000 = $ 500 x 2
Relevance of the Spending Multiplier:
So recall that we assumed the multiplier effect has a constant price level, what would
happen to the spending multiplier if the price levels vary? If an AD curve shifts to the
right, it moves to a steep portion of the curve. This changes the equilibrium point and
causes price levels and output levels to ____, therefore the _____ rises more than output
does.
Benefits of Fiscal Policy:
Fiscal Policy has two benefits as a stabilization tool:
1. Regional Focus
2. __________________
Fiscal Policy also has three main drawbacks:
1. _______
2. Political Visibility
3. ______
DAY 2
Budget Surpluses and Deficits
When a government’s revenues exceed its expenditures, there is a budget ___________.


Budget surplus = government ____________ - government expenditures
3 billion = 178.7 billion – 175.7 billion
When a government’s expenditures exceed its revenues, there is a budget ____________.


Budget deficit = government ____________ – government revenues
8.9 billion = 149.8 billion – 140.9 billion
The size of the surplus or deficit in relation to the overall _______ indicates the type of
discretionary policies in effect as well as automatic stabilizers.
A government’s deficit is not the same as its debt. A deficit is when expenditures exceed
revenues in a given period. A government’s debt is the sum of all past deficits minus all
past ___________.
Surpluses and Deficits
Sometimes they are related to discretionary fiscal policies, but more often are a result of
_____________________ like economic booms and recessions.
Impact on Public Debt
When the government has a budget deficit, the amount of _________________ increases
by the amount of the deficit.


Total debt = old debt + new deficit
583.2 billion = 574.3 billion + 8.9 billion
When the government has a budget surplus, the amount of public debt decreases by the
amount of the deficit.


Total debt = _______ - new surplus
504.7 billion = 507.7 billion – 3 billion
Fiscal Policy Guidelines
There are three principles that guide fiscal policy:



Annually balanced budgets
Cyclically balanced budgets
Functional finance
Annually balanced budgets
This is based on the theory that revenues and expenditures should balance every year.
For example, more spending should be matched with raising taxes. However, a
_______________ does not last one year, but many years. For example, in an economic
contraction, tax revenues would decrease. To keep a balanced budget government
purchases would have to decrease which would make the recession worse.
Cyclically balanced budgets
This principle is similar to the annually balanced budgets principle, but it is based on
business cycles, not years. This means that government revenues and expenditures
should be approximately equal between periods of contraction and _______________.
Functional finance
The Functional finance principle is based on meeting the current needs of the
______________, rather than trying to balance budgets annually of cyclically. The
choice of fiscal policy guidelines depends on the government’s belief in fiscal policy as
an effective tool for stabilizing the economy.
Recent Fiscal Policy
Since the mid 1980’s, Canada’s and other developed countries fiscal policies have started
to change. Before then the main principle was a functional finance, but now we are
moving towards ____________ balanced budgets. This is mostly due to past budget
deficits and how they have affected the economy.