Chapter 11

Chapter 11 - Chapter 11: Fiscal Policy Aggregate Demand the...

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Chapter 11: Fiscal Policy Aggregate Demand – the total quantity of output demanded at alternative price levels in a given time period, ceteris paribus. Purchases vs. Transfers Purchases: Government spending on… o Defense o Highways o Health care …that entail the purchase of goods and services in product markets. (these things ARE part of AD) Transfers include things like social security checks. o Income Transfers – payments to individuals for which no current good or services are exchanged such as Social Security, welfare, and unemployment benefits. o Don’t become part of AD until the transfer recipients decide to spend the income. The government can alter aggregate demand by: Purchasing more or fewer goods and services. Raising or lowering taxes Changing level of income transfers Fiscal Policy – the use of government spending and taxes to alter macroeconomic outcomes. Fiscal Stimulus – tax cuts or spending hikes intended to increase (shift) aggregate demand. o Macro equilibrium – the combination of price level and real output that is compatible with both aggregate demand and aggregate supply. o Recessionary Gap – the amount by wich equilibrium GDP falls short of full employment GDP. Keynes Emphasized: o The aggregate demand curve shifts with changes in spending behavior. o Injections of spending into circular flow multiply into much larger changes in total spending. o Way out of recession: Get someone to spend more on goods and services. Price Level Changes o When AS curve slopes upward, any increase in AD affects real output and prices. o When the AD curve shifts to the right, the economy moves up the aggregate supply curve, not horizontally to the right. As a result, both real output and the price level change. o Shifting aggregate demand by the amount of the GDP gap will achieve full employment only if the price level doesn’t rise.
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The Aggregate Demand Shortfall – the amount of additional aggregate demand needed to achieve full employment after allowing for price level changes. o
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Chapter 11 - Chapter 11: Fiscal Policy Aggregate Demand the...

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