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Expansionary fiscal policy - Coggle Diagram
Expansionary fiscal policy
if the economy is experiencing a recessionary gap during which total spending and equilibrium output falls
real GDP output is being produced at slower rate causing excessive
boost aggregate demand and equilibrium total output, minimising the short-run fluctuations around the potential output
also know as fiscal stimilus
government implements this policy with the intention of stimulating aggregate demand in order to accomplish the goals of
boosting real GDP output
eliminating cyclical unemployment (unemployment that rises and falls as a result of the business cycle)
can be visualised by a rightward shift of the aggregate demand curve
it can also be visualised by a movement leftward along the short run supply curve
an increase in the inflation rate and a decrease in the unemployment rate
expansionary policy options
increased government spending
decrease personal taxes
if the government chooses spending policy you have to use the spending multiplier to calculate the full potential increase in real GDP output when
when government uses tax policy you have to use the tax multiplier to calculate the full potential increase in real GDP output
policies will inject income into the economy and create a multiplier effect of consumer spending and investment spending by firms
will boost aggregate demand
stimulate real GDP growth
create job opportunities
cause demand pull inflation
decreases real wages as each dollar earned by workers has less purchasing power
decrease in net exports as foreign consumers buy fewer exports because they're now more expensive
when government increases its expenditures decreases personal taxes or uses a combination of both
won't have the revenue it needs to fund is new expenditures so you must borrow money this will lead to deficit spending which will drive up real interest rates in the loanable funds market
fiscal policy also leads the budget deficit
domestic firms will decrease investment spending in order to avoid paying higher interest on every dollar that they borrow which will lead to
crowding out (occurs when increased government involvement in a sector of the market economy substantially affects the remainder of the market, either on the supply or demand side of the market) in the aggregate demand
spending multiplier
1 / MPS
tax multiplier
MPC / MPS