The Spending Multiplier Effect
*an initial change in spending ( C, Ig, G, Xn) causes a largerr change in aggregate spending or aggregate demand
-Mulitiplier = change in AD over change in spending
- Multiplier = change in AD / Change in C, Ig,G, Xn
*Why does this happen?
- expenditures and income flow continuously which sets off a spending increase in the economy.

Calculating Spending Multiplier
-Multiplier = 1/1 - MPC or 1/ MPS
*multiplers are (+) when there is an increase in spending and a (-) when there is a decrease in spending.
Calculating Tax Multiplier
*when the govt taxes, the multiplier works in reverse.
*why?
- because now money is leaving the circular flow
*tax multiplier(its negative)
= -MPC/1 - MPC or -MPC/MPS
*if there is a tax CUT, then the multiplier is positive , b/c there is now more money in the circular flow.
Fiscal Policy
-changes in the expenditures or for revenues of the federal government
- 2 tools of fiscal policy
>taxes- govt can increase or decrease taxes
>spending- govt can increase or decrease spending
- fiscal policy is enacted to promote our nations economic goals.

Deficits, Surpluses, and Debt
*balanced budget
-revenues = expenditures
*budget deficit
-revenues< expenditures
*budget surplus
-revenues> expenditures
*government debt
-sum of all deficits - sum of all surpluses
*governtment must borrow money when it runs a budget deficit.
*government borrows from:
 -individuals
 -corporations
 -financial institutions
 - foreign entities or foreign governments.

Fiscal Policy Two options
*discretionary fiscal policy (action)
expansionary fiscal policy- think deficit (recession)
contractionary fiscal policy- think surplus
* non-discretionary fiscal policy ( no action)

Discretionary Vs Automatic
*Discretionary
- increasing or decreasing govt spending and /or taxes in oreder to return the economy to full employment. discretionary policy involves policy makers doing fical policy in response to an economic problem.
*Automatic
- unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation. automatic fiscal policy takes place w/o policy makers having to respond to economic problems.

Progressive Tax System
* average tax rate (tax revenue/ GDP) rises w/ GDP
Proportional Tax System
* average tax rate remains constant as GDP changes
Regressive Tax System
* average tax rate falls w/GDP