Fiscal Policy, Economic Growth, and Productivity Rapid Review for AP Economics

By — McGraw-Hill Professional
Updated on Mar 4, 2011

More in-depth study guides for these concepts can be found at:

Fiscal policy: deliberate changes in government spending and net tax collection to affect economic output, unemployment, and the price level. Fiscal policy is typically designed to manipulate AD to "fix" the economy.

Expansionary fiscal policy: increases in government spending or lower net taxes meant to shift the aggregate expenditure function upward and shift AD to the right.

Contractionary fiscal policy: decreases in government spending or higher net taxes meant to shift the aggregate expenditure function downward and shift AD to the left.

Sticky prices: if price levels do not change, especially downward, with changes in AD, then prices are thought of as sticky or inflexible. Keynesians believe the price level does not usually fall with contractionary policy.

Budget deficit: exists when government spending exceeds the revenue collected from taxes.

Budget surplus: exists when the revenue collected from taxes exceeds government spending.

Automatic stabilizers: mechanisms built into the tax system that automatically regulate, or stabilize, the macroeconomy as it moves through the business cycle by changing net taxes collected by the government. These stabilizers increase a deficit during a recessionary period and increase a budget surplus during an inflationary period, without any discretionary change on the part of the government.

Crowding out effect: when the government borrows funds to cover a deficit, the interest rate increases and households and firms are "crowded out" of the market for loanable funds. The resulting decrease in C and I dampens the effect of expansionary fiscal policy.

Net export effect: a rising interest rate increases foreign demand for U.S. dollars. The dollar then appreciates in value, causing net exports from the United States to fall. Falling net exports decreases AD, which lessens the impact of the expansionary fiscal policy. This is a variation of crowding out.

Productivity: the quantity of output that can be produced per worker in a given amount of time.

Human capital: the amount of knowledge and skills that labor can apply to the work that they do and the general level of health that the labor force enjoys.

Non-renewable resources: natural resources that cannot replenish themselves. Coal is a good example.

Renewable resources: natural resources that can replenish themselves if they are not over-harvested. Lobster is a good example.

Technology: a nation's knowledge of how to produce goods in the best possible way.

Investment tax credit: a reduction in taxes for firms that invest in new capital like a factory or piece of equipment.

Supply-side fiscal policy: fiscal policy centered on tax reductions targeted to AS so that real GDP increases with very little inflation. The main justification is that lower taxes on individuals and firms increase incentives to work, save, invest, and take risks.

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