FISCAL POLICY
Changes in federal government spending or tax revenues designed to promote full employment, price stability, and reasonable rates of economic growth.
EXPANSIONARY FISCAL POLICY
An increase in government spending and/or a decrease in taxes designed to increase aggregate demand in the economy. The intent is to increase GDP and decrease unemployment.
CONTRACTIONARY FISCAL POLICY
A decrease in government spending and/or an increase in taxes designed to decrease aggregate demand in the economy. The intent is to control inflation.
MULTIPLIER EFFECTS
Based on the idea that increased spending by consumers, businesses, or government becomes income for someone else. When this person spends the income, it becomes income for someone else, and so on, leading to increased production in an economy. Multiplier effects can also work in reverse when spending decreases.
SUPPLY-SIDE FISCAL POLICY
The idea that fiscal policy may directly affect aggregate supply and not only aggregate demand. For example, a tax cut may give businesses incentives to expand or invest in capital goods, since they have more after-tax income to spend as they choose.
KEYNESIAN THEORY
· Recessions and depressions can occur because of too little aggregate demand for goods and services.
· Inflation can occur because of too much aggregate demand for goods and services.
· Government can influence macroeconomic activity by influencing aggregate demand through fiscal and
· monetary policies.
· Fiscal policy (changes in government spending and taxes) is more powerful than monetary policy (changes in the money supply and interest rates).
NEW CLASSICAL THEORY
· The government’s power to influence the macroeconomy is limited and often ineffective.
· Monetary and fiscal policies affect expectations and have unanticipated secondary effects that make these policies ineffective.