Problem : Define expansionary fiscal policy.

Expansionary fiscal policy is policy enacted by the government to increase output. The two major vehicles for expansionary fiscal policy are reducing taxes and increasing government spending.

Problem : Define contractionary fiscal policy.

Contractionary fiscal policy is policy enacted by the government to decrease output. The two major vehicles for contractionary fiscal policy are increasing taxes and decreasing government spending.

Problem : How does fiscal policy affect output?

Fiscal policy affects output directly though increasing consumption and government spending and indirectly through the tax and government spending multipliers.

Problem : What is the equation that shows the total change in output created by a change in tax policy?

The total change in national income as a result of a change in tax policy is equal to [(change in taxes) * -MPC] / (1 - MPC).

Problem : What is the equation that shows the total change in output created by a change in government spending?

The total change in output as a result of a change in government purchases is equal to (change in government purchases) / (1 - MPC).