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BU204 - Macroeconomics Unit 7 Seminar Key Terms Assignment • • • • • • Potential Output Recessionary gap Expansionary fiscal policy Inflationary gap Contractionary fiscal policy Automatic stabilizers Unit 7 - Key Concepts • Basics of Fiscal Policy – Taxes, Purchases, Transfers, and Borrowing • Expansionary Fiscal Policy – Shift AD right to close a recessionary gap. • Increase purchases • Cut taxes • Increase transfers • Contractionary Fiscal Policy – Shift AD left to close an inflationary gap. • Reduce purchases • Increase taxes • Reduce transfers • Lags in Fiscal Policy • The Multiplier Effect (Purchases): – Extra increase in GDP do to a increase in government spending. – Multiplier = 1 / (1-MPC) • Government Budget – Surpluses – Deficits • Long-Run Implications of Fiscal Policy – Debt – Debt-GDP Ratio Unit 7 Assignment Chapter 12 Question 3: 3. • An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap — inflationary or recessionary — will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output? • a. A stock market boom increases the value of stocks held by households. • b. Firms come to believe that a recession in the near future is likely. • c. Anticipating the possibility of war, the government increases its purchases of military equipment. • d. The quantity of money in the economy declines and interest rates increase.