Unit 14: Unemployment & Fiscal Policy Flashcards
(20 cards)
What is the aggregate demand function?
AD = C + I + G + NX
What is autonomous consumption (c₀)?
Spending that does not depend on income.
What is the marginal propensity to consume (c₁)?
The fraction of additional income that is spent.
What is the multiplier formula?
1 / (1 - c₁*) when government and trade are included.
*c₁ = MPC.
Why is the multiplier greater than 1?
Because initial spending circulates through the economy, generating more income.
What happens when investment falls?
AD shifts down, output falls by more than the initial change due to the multiplier.
What are the three options for firm profits?
Consume (if ρ > r), save (if r > ρ), invest (if π > ρ).
How does interest rate affect investment?
Lower interest rates make investment more attractive.
What are the main leakages from the circular flow?
Savings, taxes, and imports.
What is an automatic stabiliser?
A policy that automatically offsets fluctuations in the economy (e.g. unemployment benefits).
How does government spending affect AD?
It increases AD directly and stimulates output via the multiplier.
What is fiscal stimulus?
Government policies aimed at boosting economic activity by increasing spending or reducing taxes.
Why might the multiplier be smaller in expansions?
Because the economy may be near capacity or expectations may offset the effect.
What is the primary budget balance?
Tax revenues minus government spending (excluding interest payments).
What is the debt-to-GDP ratio?
A measure of government debt relative to the size of the economy.
Why is high government debt a concern?
It can lead to higher interest payments and fears of default.
What is a sovereign debt crisis?
When investors lose confidence in a government’s ability to repay its debt.
What is austerity?
Policies aimed at reducing government debt by cutting spending or increasing taxes.
What are the effects of austerity during a recession?
It may reduce demand and worsen the economic downturn.
What determines the size of the multiplier?
MPC (c₁), marginal tax rate (t), and marginal propensity to import (m).
