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Block 2, C = a + bY - Coggle Diagram
Block 2
Fiscal policy
Concepts
Multiplier effect
Impact of fiscal stimulus is multiplied through economy
Change in income / change in gov spending (that caused it)
Crowding out
Consumption function
measures relationship between income and consumption
Types
Automatic stabiliser
passive intervention to smooth out fluctuations
Discretionary stabiliser
active intervention to smooth out fluctuations
Expansionary
Contractionary
Tools
Government spending
Directly increases C :heavy_check_mark:
Possible crowding out of I or C :red_cross:
Political approval = more time :red_cross:
Possible primary budget deficit = increase public debt :red_cross:
Tax rate
Directly increases C :heavy_check_mark:
Increases the multiplier :heavy_check_mark:
Uncertain impact if tax system complex :red_cross:
Political approval = more time :red_cross:
Monetary policy
Tools
Base rate
Quantitive easing
Cons
(Indirect) transmission mechanism
Low animals spirits (firms)
Divergence base/interest rate
Banks liquidity preference
Zero lower bound problem
Pros
Easy and quick to implement if controlled by CB
Keynes and unemployment
Keynes idea
Markets need GOV intervention
Policy goals
full employment
greater equality
Concepts
Paradox of thrift
Circular flow of income
Consumption function
Policy choices
Models
C = a + bY