# Macro Economics Chapter 11 Power Point Flashcards

What is a discretionary fiscal policy?

The deliberate use of changes in government spending or taxes to alter aggregate demand

What are examples of expansionary fiscal policy?

•Increase government spending•Decrease taxes•Increase government spending and taxes equally

An Increase in government spending leads to an Increase in the __________ _________ curve. Than an increase in the ________ _______ and the _____ ____.

aggregate demandprice levelreal GDP

What is the spending multiplier?

Any initial change in spending leads to a chain reaction of more spending which causes a greater change in demand.

How is the spending multiplier calculated?

The ratio of the change in real GDP to an initial change in aggregate expenditure.

What is marginal propensity to consume?

MPC is the change in consumption resulting from a change in income.

What is marginal propensity to save?

MPS is the change in saving resulting from a change in income.

If MPC is 0.75, what is MPS?

.25

With an MPC of 0.75, what is the spending multiplier?

1/MPS = 1/1/4 = 4

How much will real GDP increase with an increase in government spending of $50 billion?

4 x $50B = $200B

What is the tax multiplier?

The change in aggregate demand (total spending) resulting from an initial change in taxes.

What happens when government cuts taxes by $50 billion?

The multiplier process is less because initial spending increases only by $38B instead of $50B

What is the conclusion?A tax cut has a _________ multiplier effect on _________ _________than an equal increase in __________ __________..

- smaller- aggregate demand - government spending

What is the formula for the tax multiplier?

1 – spending multiplier

With a spending multiplier of 4 what is the tax multiplier?

1 – spending multiplier = – 3