fiscal policy on AD and AS

• How do expansionary and contractionary fiscal policies differ in their approach to managing the economy?

  Expansionary increases spending; contractionary decreases spending
• What is the effect of contractionary fiscal policy on taxation?

  It increases taxation
• How does the government use fiscal policy during a recession?

  By increasing spending to create jobs
• What action might the government take to cool down an overheating economy?

  Raise taxes to reduce spending
• What does aggregate demand represent in an economy?

  Overall demand from households, businesses, and government
• What is the definition of aggregate demand (AD)?

  Total goods and services buyers will purchase
• What are the two types of fiscal policy and their effects on spending and taxation?

  • Expansionary Fiscal Policy:
  • Increases government spending
  • Decreases taxation
  • Contractionary Fiscal Policy:
  • Decreases government spending
  • Increases taxation
• What is the definition of fiscal policy?

  Government using spending and taxation to manage economy
• What does investment (I) refer to in aggregate demand?

  Spending by businesses on capital goods
• What does aggregate supply (AS) represent?

  Total quantity of goods and services
• If consumption is $500, investment is $200, government spending is $300, and net exports are $50, what is the aggregate demand?

  $1,050
• What is the relationship between the components of aggregate demand?

  They collectively determine total demand in the economy
• What does government spending (G) refer to in aggregate demand?

  Government purchases of goods and services
• What do the symbols P₁ and P₀ represent in the context of AD?

  P₁ is the new price level, P₀ is the initial price level
• What factors shape aggregate supply (AS)?

  Resource availability, technology, labor productivity
• What does net exports (NX) refer to in aggregate demand?

  Exports minus imports
• What are the components of aggregate supply?

  • Short-Run Aggregate Supply (SRAS)
  • Influenced by input costs
  • Long-Run Aggregate Supply (LRAS)
  • Occurs at full employment
• What is the opposite of contractionary fiscal policy?

  Expansionary fiscal policy
• What happens to the AD curve when expansionary fiscal policy is implemented?

  It shifts rightward
• What are the key differences between the LRAS and SRAS curves in the image?

  • The LRAS curve is vertical, indicating output is determined by factors like technology, capital, and labor supply.
  • The SRAS curve is upward-sloping, indicating output can change in the short-run in response to changes in aggregate demand.
  • The LRAS curve represents the long-run relationship between output and price level, while the SRAS curve represents the short-run relationship.
• What is the long-run impact of expansionary fiscal policy if the economy is at full employment?

  It may lead to inflation without increasing output
• What influences Short-Run Aggregate Supply (SRAS)?

  Input costs
• What is the effect of expansionary fiscal policy on government spending?

  It increases government spending
• What do the symbols Y₁ and Y₀ represent in the context of AD?

  Y₁ is the new real GDP, Y₀ is the initial real GDP
• What are the effects of a rightward shift in the AD curve?

  Higher prices and increased real GDP
• What happens to short-run aggregate supply (SRAS) when aggregate demand increases?

  SRAS shifts to the right
• What does the acronym SRAS stand for?

  Short-Run Aggregate Supply
• What does consumption (C) refer to in aggregate demand?

  Spending by households on goods and services
• What happens to inflation in the long-run if the economy is at full employment?

  It may decrease without decreasing output
• What are the consequences of a leftward shift in the AD curve?

  Lower prices and decreased real GDP
• What are the components of aggregate demand (AD)?

  • Consumption (C): Spending by households
  • Investment (I): Spending by businesses
  • Government Spending (G): Government purchases
  • Net Exports (NX): Exports minus imports
• What does the graph illustrate about the AD curve during expansionary fiscal policy?

  The AD curve shifts from AD₀ to AD₁
• What happens to the AD curve as a result of contractionary fiscal policy?

  It shifts leftward
• What is Short-Run Aggregate Supply (SRAS)?

  Aggregate supply over a brief period
• What is Long-Run Aggregate Supply (LRAS)?

  Aggregate supply at full employment
• What is the result of the equilibrium moving from E₀ to E₁?

  Higher output and prices
• How many key types of time lags are there in fiscal policy?

  Three
• How does expansionary fiscal policy affect aggregate demand?

  It boosts aggregate demand
• What determines the long-run impact of contractionary fiscal policy on LRAS?

  Whether the economy is at full employment
• What does the acronym LRAS stand for?

  Long-Run Aggregate Supply