Macroeconomics Theories and Policies

Business

Quiz 19 :
Fiscal Policy

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Quiz 19 :
Fiscal Policy

Policy makers are viewed as ideologically motivated leaders of competing parties.Two parties exist,a liberal party and a conservative party exist.Price stability is highly valued by the conservatives while the liberals emphasize full-employment and the redistribution of income.Because conservatives focus on price stability,they emphasize lower budget deficits.

A political business cycle pertains to the public choice view.It emerges when aggregate demand is overly stimulative in the period before the re-election of politicians with inflation following after the election.As a result,business cycles should be regular and closely follow the election cycle.The partisan theory predicts party cycles as macroeconomic policy varies depending on which party is in power.Because changes in power are irregular,business cycles should vary in length and rates of occurrence.

Automatic fiscal stabilizers work by reducing the response of aggregate demand and,hence,income to changes in autonomous investment demand or government spending.The larger the level of automatic stabilizers,the larger will be the cyclical deficits run during recessions and the smaller will be cyclical deficits during expansions.Changes in automatic stabilizer programs only affect cyclical,not structural deficits,although the long-run level of spending on programs such as unemployment benefits and Medicare payments do contribute to structural deficits.