IB Econ 3.6 Fiscal Policy (including HL) | Baamboozle - Baamboozle

If MPC increases, the Keynesian multiplier would…

MPC increases: multiplier increases! e.g. 1/(1-0.4) = 1.667 vs. 1/(1-0.6)=2.5

The formula for calculating how much GDP increases due to injections is...

change in GDP = amount of injection x 1/(1-MPC)

The formula for the Keynesian Multiplier is...

1/(1-MPC) = 1/(MPM+MPS+MPT)

The Keynesian Multiplier considers propensities to...

Consume (domestic) goods and services, Spend on imports, Be taxed by the government, Save

Identify TWO examples of transfer payments.

Unemployment benefits, social security (retirement) etc.

Transfer payments do not increase GDP. True or false + explain.

False! Doesn't count as G but will later be reflected as increases consumer expenditure

Transfer payments are not counted in government spending. True or false + explain.

True. Does not go to firms (goes to consumers) so does not lead to output.

Identify TWO forms of automatic stabilizers.

Progressive taxes, unemployment benefits

Expansionary fiscal policy always leads to inflation. True or false + explain?

To Keynesians: false! May have spare capacity. To Monetarists = true!

Explain TWO time lags that fiscal policies are faced with.

Administrative lag (political pushback / approval processes), recognition lag (takes time to recognize issue), effectiveness lag (e.g. income tax takes time)

Outline TWO strengths of fiscal policy

Recover from deep recession + targeting specific economic sector

If fiscal policy increases both AS and AD, how do we know whether there will be inflation or (benign) deflation?

Depends on whether AS or AD increases by a larger amount! In reality probably inflation

Explain why fiscal policy may increase AS.

Any government spending which improves the quantity or quality of resources will improve AS

Using an example, explain how automatic stabilizers work during a contraction and expansion

Unemployment benefits: contraction = distribute benefits --> increase AD; expansions = less benefits --> AD doesn't increase too quickly

Graph out crowding out using a money supply / money market diagram.

Graph correctly!

Outline THREE limitations of fiscal policy.

Political pressures, Time lags, Sustainable debt, Crowding out

Briefly explain what is meant by crowding out.

When increased gov't borrowing causes interest rates to rise and reduces private borrowing as a result

Define automatic stabilizers

Automatic stabilizers are factors that stabilize the economy without government intervention by dampening the short-term fluctuations of the business cycle.