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.