44-5244_Ch15A_G
4/12/04
2:28 PM
Page 1
1. contractionary fiscal policy
2. Rising prices tend to result in decreased unemployment
levels (by causing increased production).
15A
Building Key Concepts
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Answers
Fiscal Policy
This flowchart shows the expected effects of the government’s expansionary fiscal policies—intended to
encourage economic growth—and contractionary fiscal
policies designed to slow economic growth.
Expansionary Fiscal Policies
Increasing Spending
Company
profits increase
Cutting Taxes
Business
investment increases
Contractionary Fiscal Policies
Decreasing Spending
Company
profits decrease
Raising Taxes
Business
investment decreases
AND
Worker pay rises
Consumer
spending rises
AND
Worker pay stays
the same or falls
Consumer
spending falls
Aggregate demand increases
Aggregate demand decreases
Prices rise
Prices fall
Suppliers of goods increase production
Suppliers of goods cut production
Unemployment levels drop
Unemployment levels rise
1. What kind of fiscal policy can lead to a decrease in
production?
2. What effect do rising prices have on unemployment?
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