3/30/2023 0 Comments Automatic stabilizers quizlet![]() ![]() With aggregate demand not declining by as much as it otherwise would, the decline in real GDP is reduced. These changes in taxes and transfer payments make the decline in income smaller than it would otherwise be, which results in a smaller decline in consumption spending. ![]() In what ways does the federal budget serve as an automatic stabilizer for the economy? When real GDP falls below potential GDP, households and firms pay less in taxes to the federal government and the federal government makes more transfer payments to the unemployed. In the short run, an increase in government purchases results in partial crowding out, but in the long run, a permanent increase in government purchases results in the complete crowding out of an equal amount of private expenditures. Explain the difference between crowding out in the short run and in the long run. What is meant by "crowding out"? Crowding out refers to a decline in private expenditures-consumption, investment, and net exports-as a result of an increase in government purchases. Even after being approved, it takes time to implement it. have a negative multiplier effect on equilibrium real GDP Why is the timing of fiscal policy is harder? - The president and a majority of the members of Congress have to agree on changes in fiscal policy have a positive multiplier effect on equilibrium real GDP A decrease in government purchases and a increase in taxes will. A cut in the tax affects equilibrium real GDP through two channels: 1) as tax rate decreases, consumption spending increasesĢ) and tax rate decreases, multiplier effect increases An increase in government purchases and a decrease in taxes will. Is tax multiplier number negative? Why? Yes, it is a negative number because the change in taxes and the change in real GDP move in opposite directions. multiplier effect the series of induced increases in consumption spending that results from an initial increase in autonomous expenditures. ![]() Induced (indirect) effect The increase in consumption spending that results from the initial autonomous increase in government purchases. Autonomous (direct) effect The initial increase in government purchases that is the result of a decision by the government. The tax multiplier is the ratio of the change in equilibrium real GDP to the change in taxes. Decreasing government purchase or increasing taxes -> will decrease aggregate demand Expansionary fiscal policy real GDP and the price level will increase Contractionary fiscal policy real GDP and the price level will decrease Define government purchases and tax multipliers The government purchases multiplier is the ratio of the change in equilibrium real GDP to the change in government purchases. Increasing government purchase or decreasing taxes -> will increase aggregate demand When in inflation. Federal government expenditures -Purchases This is an infrastructure investment by a state government. During a recession, California voters approve additional spending on a statewide high-speed rail system. Discretionary fiscal policy if the temporary cut in payroll taxes was intended to stimulate spending and increase real GDP. Congress and the president enact a temporary cut in payroll taxes. ![]()
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