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More about fiscal policy: 

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• contractionary fiscal policy:
• laws that reduce inflation, decrease GDP (close inflationary gap) 
• decrease government spending
• tax increases
• combination of the two
• expansionary fiscal policy (the gas):
• laws that reduce unemployment, an increase GDP (close recessionary gap) 
• increase government spending
• combination of the two 
• automatic of built in stabilizers: 
• anything that increases the governments budget deficit during a recession & increases its budget surplus during inflation without requiring explicit action from policy makers
• transfer payments: 
• welfare checks
• food stamps 
• unemployment check
• corporate dividends
• social security 
• veterans benefits  

how does the government stabilize the economy

How does the government stabilize the economy?

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• the government has two different tool boxes it can use: 
• fiscal policy (action)- actions by congress to stabilize the economy. 
• fiscal policy changes in expenditures or tax revenues of the federal government:
• taxes- government can increase or decrease taxes
• spending- the government can increase or decrease spending
• fiscal policy is enacted to promote our nations economic goals: full employment, price stability, economic growth. 
• balanced budget:
• revenues equal expenditures
• budget deficit:
• revenues are less than expenditures
• budget surplus
• revenues are greater than expenditures
• government debt
• sum of all deficits - sum of all surplus's
• government can borrow money from
• individuals
• corporations
• financial institutions
• foreign governments or nations
• there are two options under fiscal policy: 
• discretionary fiscal policy (action)
• expansion- think deficit
• contractionary- think surplus
• non discretionary (no action)
• types of taxes: 
• progressive taxes- takes a larger percent of income from high income groups 
• proportional taxes- takes the same percent of income from all income groups 
• regressive taxes- takes a larger percent of income from low income groups

why prices are sticky in a downward direction

Reasons why prices tend to be sticky in a downward direction:

• Wage contracts
• Fear of price wars
• Menu costs
• Minimum wage
• Morale, effort, and productivity

consumption and saving

Consumption and saving

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• Disposable income- anything you have left after you pay your bills. Income after taxes.
• DI=gross income - taxes
• Two choices- spend or save
• Consumption- constrained by:
• Amount of disposable income
• Propensity to save
• Do households consume when DI=0?
• Yes, autonomous consumption
• Dissaving
• APC = C/DI = % DI that spent
• Saving
• Household not spending
• Ability to save constrained by:
• Amount of DI
• Propensity to consume
• Cannot save W/o DI
• APS = S/DI = % DI that is not spent
• APC (+) APS = 1
• 1 (-) APS = APC
• 1 (-) APC = APS
• APC > 1: dissaving
• -APS: dissaving
• Marginal propensity to consume:
• Change in consumption / change in DI
• % of every extra $ earned that is spent
• Marginal propensity to consume:
• Change in saving / change in DI
• % of every extra $ that is saved
• MPC (+) MPS = 1
• 1 (-) MPC = MPS
• 1 (-) MPS = MPC
• determinants of C & S
• Wealth
• Expectations
• Household debt
• Taxes
• Spending multiplier effect:
• Initial change in spending (C, IG, G, Xn) causes a change in larger change in AD
• Multiplier = change in AD / change in spending
• Multiplier = change in AD / change in C, IG, G, Xn
• Why does this occur?
• Expenditures and income flow continuously which sets off a spending increase in the economy
• Spending multiplier can be found from MPS or MPC
• Multiplier = 1/ 1 - MPC OR 1/MPS
• Multipliers are (+) when there is an increase in spending.
• Multipliers are (-) in decrease
• When the gov’t taxes, the multiplier works in reverse because how money is leaving the circular flow
• -tax multiplier = - MPC / 1 - MPC  OR -MPC / MPS
• If there is a tax cut then the multiplier is positive because there is now more money in the circular flow