What is Fiscal Policy? Types?
Government policies on taxes, spending and borrowing during fluctuations in the business cycle
Expensionary: Spending more
Contractionary: Spending less
What is crowdin Out and the fiscal multiplier?
Crowding Out: Happens when economy is at full employment and government spends more —> Private Sector gets smaller
Fiscal Mutliploer: Economy at Recession (Unemployment) —> Spending increase GDP —> $1 spend adds more to GDP than $1 (workers that have a job now buy products)
What Legs are there in Fiscal Policy?
Recognation Lag
Legislative Lag
Implementation Lag
Effectiveness Lag
Fiscal Stimulus
Best case scenario
Negative AD Shock
During an negative AD shock, ressources are underemployed
Government can increase spending/ decrease taxes —> Increase Velocity of Money —> Shift AD curve back
Ideal Fiscal Policy
Timely
Targeted
Tempoary
Worst Case Scenario
Negative Real Shock
With Increase Spending or Decrease Taxes, Gov can shift AD curve to right, but we have higher inflation
Also with more debt, economy might collabs
Monetary Offset:
Fiscal Policy: Gov spends more —> AD to right
Monterary Policy: Central bank contract money supply —> SHift to left
Gov cuts taxes, but people never spend the safet money, Multiplier is 0 (Ricardian Equivalence)
Gov increase spending by borrowing, increase interest rate, businesses invest less
Last changed8 days ago