Short Run Fiscal Actions - AP Macroeconomics

Contractionary monetary policy. Used to reduce inflation and slow economic growth.

Raising taxes. Reduces aggregate demand to control inflation.

The fraction of additional income that is spent on consumption. Key component in calculating multiplier effects.

$\frac{1}{1 - MPC}$. Shows how initial spending creates multiplied economic impact.

Aggregate demand increases. Lower taxes increase disposable income and consumer spending.

Aggregate demand decreases. Higher taxes reduce disposable income and consumer spending.

Increases money supply. Buying bonds injects money into the banking system.

Decreases money supply. Selling bonds removes money from the banking system.

Increases aggregate demand. Direct injection of money into the economy boosts total demand.

Unemployment benefits. Payments increase during recessions, providing economic stimulus.

They automatically adjust spending and taxes based on economic conditions. Provide economic stability without legislative action.

Raising taxes. Reduces aggregate demand to control inflation.

Increased budget deficit. Government borrowing increases when spending exceeds revenue.

Stimulates economic growth. Increases aggregate demand, leading to higher GDP and employment.

Increases aggregate demand. Direct government purchases boost economic activity immediately.

Can increase interest rates if financed by borrowing. Government borrowing increases demand for loanable funds.

When government borrowing reduces private investment. Government borrowing competes with private sector for funds.

Government revenue exceeds spending. Government can pay down debt or increase spending.

Decreased borrowing and spending. Higher rates increase cost of borrowing, reducing economic activity.

Increased borrowing and spending. Lower rates reduce cost of borrowing for businesses and consumers.

Contractionary monetary policy. Used to reduce inflation and slow economic growth.

Expansionary fiscal policy. Both expansionary fiscal and monetary policy can use this approach.

Open market operations. Other tools include discount rate and reserve requirements.

To reduce inflation by decreasing money supply. Higher interest rates discourage borrowing and spending.

Decreases in government spending or tax increases to slow the economy. Reduces aggregate demand to cool an overheated economy.

Increases in government spending or tax cuts to stimulate the economy. Boosts aggregate demand during recessions or slow growth periods.

Central bank actions that manage money supply and interest rates. Federal Reserve tools to control economic conditions through money.

Government adjustments in spending and taxation. Government tools to influence economic activity through budget decisions.

Government spending exceeds revenue. Government must borrow money to finance the shortfall.