Ag_Econ 1042 1st Edition Lecture 13 Outline of Last Lecture I. Public Policy RoleII. What to Study for the ExamOutline of Current Lecture I. Fiscal Policya. Expansionary Fiscal Policyb. Contractionary Fiscal PolicyII. Time Lagsa. Policy Toolsi. Automatic Stabilizersii. Discretionary Fiscal PolicyIII. The Multiplier Modela. Multiplier Effectb. Marginal Propensity to Consume (MPC)c. Government Spending Multiplierd. Taxation MultiplierCurrent LectureI. Fiscal PolicyFiscal policy refers to the government decisions about the level of taxation or government spending. Fiscal Policy influences aggregate demand through government spending and tax policies that directly affect consumption. There are two types of fiscal policy: expansionary and contractionary. Expansionary fiscal policyoccurs when government spending is increased and taxes are lowered. This causes the aggregate demand curve to shift right, prices to increase and demand to increase. Contractionary fiscal policy occurs when government spending is decreasedand taxes are increased. Thus, causing aggregate demand to shift left, prices to decreases and output to decrease.II. Time LagsWhen fiscal policies are made, they are usually educated guesses. However, there are time lags between when policies are chosen and when they are implemented, which can cause the fiscal policy to be ineffective or harmful. There are three potential time lags: information, formulation, and implementation time lag.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.There are two policy tools: Automatic stabilizers and a discretionary fiscal policy. Automatic stabilizers are taxes and government spending that affect fiscal policy without specific action from policy-makers. Taxes are an example of an automatic stabilizer. Discretionary fiscal policy refers to adjusting tax rates in response to economic conditions, and it can be used when automatic stabilizers fail in correcting the economy.III. The Multiplier ModelEconomists use multipliers to measure the effect government spending or tax cuts will have on national income. The multiplier effect is the increase in consumer spending that occurs when spending by one person causes others to spend more as well. Thus making the impact of one person spending money a major deal. In order to determine how much GDP increases an economists can use the proportion of income people spend. People usually consume part of their income and save the rest. Marginal propensity to consume (MPC) is the amount that consumption increases when after-tax income increases by $1.00. This number can range from zero to one, and is usually a decimal.Government-spending multiplier is the amount that GDP increases when government spending increases by $1.00. To determine this number, one is divided by the difference of one minus MPC. The MPC and the government-spending multiplier have a linear relationship, so if one increases so does the other and vice versa.Then there is the taxation multiplier. That is the amount that GDP decreases by whn taxes increase by $1.00. To calculate the taxation multiplier divide the negative MPC by the difference of one minus MPC. The multiplier effect of tax cuts is smaller than the effect of government sending, and tax cuts boost GDP indirectly through an effect on consumption. Therefore, the impact of the tax cuts and government spending varies by the