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EconomicsModule 3 of 8

Fiscal Policy

6

Concepts

3

Formulas

1

Decisions

4

Quiz Questions

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Key Concepts

6 concepts covered in this module.

Fiscal Policy Tools

Government spending and taxation. Expansionary: increase spending / cut taxes. Contractionary: cut spending / raise taxes.

Fiscal Multiplier

The amplified impact of government spending on GDP. Multiplier = 1 / (1 - MPC × (1-t)). Higher MPC = larger multiplier.

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Formulas

3 essential formulas for this module.

Fiscal Multiplier

Multiplier = 1 / (1 - MPC(1-t))

Where: MPC = marginal propensity to consume, t = tax rate

Tax Multiplier

Tax Multiplier = -MPC / (1 - MPC(1-t))

Where: Smaller in absolute value than spending multiplier

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Decision Frameworks

1 decision frameworks to guide your analysis.

Expansionary vs Contractionary fiscal policy?

  • Expansionary (increase G, cut T) during recessions to boost demand
  • Contractionary (cut G, raise T) during overheating to cool demand

Mind Map

Visual overview of how concepts connect in this module.

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Fiscal Policy Tools

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Answer
Government spending and taxation. Expansionary: increase spending / cut taxes. Contractionary: cut spending / raise taxes.
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Monetary Policy