Effects Of Gov't Policy

Front 1

Discretionary policy
(Term)

Back 1

Deliberate use of changes in gov’t spending or taxes to alter AD and stabilize economy.

Front 2

Expansionary policy
(List)

Back 2

1. Gov't spending increase
2. Taxes decrease

Front 3

Contractionary policy
(list)

Back 3

1. Gov't spending decrease
2. Taxes increase

Front 4

Classical non-intervention policy
(List)

Back 4

- No government involvement
- Laws of supply and demand will solve the problems

Front 5

Classical economist recession assumptions
(List)

Back 5

1. Downturns are temporary

2. In the long run the economy operates at full employment/production.

3. Spending and supply creates demand ( Say's law of production).

Front 6

Classical non-intervention solution effects
(List)

Back 6

1. Prices decrease
2. Demand increase
3. interest rate decrease
4. wages decrease
5. costs of inputs decrease
6. unemployment increase

Front 7

Keynesian recession assumptions
(List)

Back 7

- Downturns can be prolonged
- Unemployment equilibrium
- Demand creates supply
- Downturns are caused by lack of spending (AD lack)
- Government intervention is needed

Front 8

Keynesian intervention/discretionary solution to recession
(List)

Back 8

*Objective of policies are to increase Aggregate demand.

1. Direct government intervention

2. Government changes gov’t spending and taxation policy

3. Increase in gov’t spending

4. Taxes decreased

Front 9

Automatic policy
(Term)

Back 9

Gov't spending which occurs automatically, such as:

- Welfare
- Unemployment payments

Front 10

Keynesian intervention solution effects
(List)

Back 10

1. Unemployment decrease
2. Income increase
3. Production increase
4. GDP increase
5. Spending increase
6. AD increase
7. Sales increase
8. Profits increase
9 . Demand-pull inflation
9. World saved from suffering

Front 11

Characteristics of government spending
(List)

Back 11

- Inflationary
- has negative impact on federal budget
- increases national debt
- increases interest rates
- ineffective long term policy

Front 12

Federal budget depression
(Term)

Back 12

Situation in which revenue (tax) is half of expenditures (Gov't spending)

Front 13

Government securities
(Concept)

Back 13

Notes from Gov't, purchased by investors, which promise to pay with interest the value on note.

Come in various forms, distinguished by maturity date
- Bills (less than one year)
- Notes ( 1-10 years)
- Bonds (10-30 years)

Government increases the interest rate on securities to attract investors. Doing this causes an increase in mortgage and auto loans, but a decrease in business loans.

Because business loans decrease, spending decreases, and AD decreases.

Front 14

Supply side economic solution to recession
(concept)

Back 14

- Cut taxes

Front 15

Supply side economic solution effects
(List)

Back 15

Effects on consumers..
- Decreased wages
- decreased cost of goods
- increase employment
- increase savings
- decrease interest
- increase borrowing

Effects on business...
- Increase net profits
- increase investment spending (business spending)
- increase production
- increase jobs
- increase AS

Front 16

Laffer theory and curve
(concept)

Back 16

Theory: Keep tax rates low so people work more and business stays domestic.

Curve: shows an upward trending curve, with tax % on Y axis and Gov't revenue on X axis. Curve continues upward until reaching "point of max return", where it starts to trend up in the opposite direction creating a horizontal "V" formation.

Front 17

Automatic stabilizers
(term)

Back 17

Fiscal mechanisms within US economy which help stabilize effects of change. Increases unearned income, and thus stimulates spending, increasing AD. Also cause increase in budget deficits and debt.

Assist in offsetting a recession when real GDP falls and in offsetting inflation when real GDP expands.

They are considered non-discretionary

Front 18

Keynesian non-discretionary solution to recession
(concept)

Back 18

Use economic stabilizers such as

- Welfare
- unemployment
- Social security

Front 19

Balance budget multiplier theory

Back 19

A policy that requires the gov’t to match all new spending with new taxes is called the balanced budget approach, and brings the balanced budget multiplier into effect.

The net effect of this multiplier on AD is equal to the initial change in government spending.