Models of Macro Economic Equilibrium

TOPIC V: Fiscal Policy

OBJECTIVES:
  1. define fiscal policy.
  2. differentiate between discretionary and automatic stabilization policies.
  3. calculate and explain the result of an increase in government spending.
  4. calculate and explain the tax multiplier effect.
  5. calculate and explain the balanced budget multiplier effect.
  6. explain the relationship between deficits and surpluses and discretionary fiscal policies.
  7. cite reasons for using one type of discretionary policy over another.
  8. cite advantages and disadvantages of using fiscal policy.

KNOW THE FOLLOWING TERMS

fiscal policy 

recessionary gap 

inflationary gap

deficit

surplus

restrictive fiscal policy 

counter cyclical policy

automatic stabilizers 

crowding out 

KEY CONCEPTUAL QUESTIONS

  1. What is fiscal policy?
  2. What is the reason that the taxation multiplier is less than the government expenditure multiplier?
  3. What is an output gap and how can fiscal policy eliminate it?
  4. What is an expansionary gap, and how can fiscal policy eliminate it?
  5. What is automatic fiscal policy, and how does it lend stability to an economy?