1. The greatest second part of fiscal policy powerpoint ever made

2. Business Cycles Key Terms Expansion Long term growth Trend Peak
Recession
Trough
Expansion
Recession
Boom
Long term growth trend
Downturn
Upturn
Trough
Peak
Jan.-
Mar
Total Output
Apr.-
June
July-
Sept.
Oct.-
Dec.

3. Aggregate Demand & Supply
Remember:
Aggregate – collective, the whole, everything added up
Same shape as regular supply and demand
X Axis is output/real GDP

4. Fiscal Policy
Fiscal Policy intends to fix, via government intervention, the interruptions caused by the business cycle
Expansionary
Contractionary

5. Types of Fiscal Policy
Expansionary
Contractionary
Government spending more money than is being brought in to speed up economy
Prices go up minimizing recession
Government bringing in more money than it is spending to slow down the economy
Prices go down, minimizing bubble
GDP
AD’
GDP
AD’

6. Why does giving people money help?
Maximizing GDP is a core goal of the federal government in its fiscal policy
GDP is determined by the following formula:
GDP(Y)=C+I+G+X
Consumption, Investment, Government, Net Exports

7. GDP (Y)=C+I+G+X C
Giving people money increases consumption, thereby increasing GDP I
Investment is businesses investing in new factories, etc. G
If the government spends money, that also increases GDP X
Net Exports is Total Exports Minus Imports (negative for US)

8. Marginal Propensity to Consume/Save
Economists refer to MPC and MPS when looking at how government spending helps
MPC is the change in spending over the change in income
MPS is the change in saving over the change in income

9. MPC
If you were given a dollar more than you currently have, how much of that dollar would you spend?
80 cents? – MPC=.8
25 cents – MPC =.25
All of it? – MPC = 1

10. MPS
If you decided to spend 80 cents of your dollar, your MPC would be .8. Therefore your MPS is simple to derive
MPC + MPS = 1
MPS = .2

11. So who cares. Econ sucks. 
MPC is how we figure out the spending multiplier
1/(1-MPC)
1/(1-.8)
1/.2 5
This means that for each 1 dollar given, spending (C) increased by $5
So does GDP
GDP= C+I+G+X

12. In summary GDP = C + I + G + X
Expansionary Fiscal policy aims to increase C
Marginal propensity to consume is our increase in spending divided by our increase in income
The multiplier 1/(1-MPC) shows how much our GDP can be increased