Chapter 12 - Chapter 12(shortened FISCAL POLICY Fiscal...

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Chapter 12 (shortened) FISCAL POLICY
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Fiscal Policy From last time: according to AS-AD model, an economy will always operate at potential GDP/full employment in the long term Question: How long is “in the long term“?
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Fiscal Policy Answer by classical economists: adjustments take place rather quickly (when AD decreases wages fall quickly full employment is restored) Starting 1929: the Great Depression Peak in 1933: UE rate at 25%, real GDP had declined by one third After 1933: very slow recovery (1937: UE still at 14%)
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Fiscal Policy 1936, British economist John Maynard Keynes: pessimistic expectations may cause the self- correction mechanism of the economy to act very slowly The „long-run“ might be too far away In the long-run we‘re all dead “ (Keynes) Keynes: government should take on a more active role for stimulating the economy (use the federal budget as a tool) Activist economists vs. nonactivist economists
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The Problem: Unemployment and Inflation If the real GDP is below potential output in the short-run equilibrium UE rate above natural rate of UE ( recession) Recessionary gap : amount by which the real GDP is below potential GDP If short-run equilibrium output beyond potential GDP strong demand for labor puts upward pressures on wages and prices inflationary pressures inflationary gap between real GDP and potential GDP
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The Problem: Unemployment and Inflation
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The tool: The Fiscal Budget Federal budget = federal government‘s anticipated receipts (taxes, duties) and planned expenditures (transfer payments, purchases of
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This note was uploaded on 04/29/2008 for the course ECON 101 taught by Professor Fels during the Spring '08 term at Wisconsin Milwaukee.

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Chapter 12 - Chapter 12(shortened FISCAL POLICY Fiscal...

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