Chapter 12 Practice

Chapter 12 Practice - To prevent that: govt can increase...

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Chapter 12: Repetition & Practice
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Using Expansionary Fiscal Policy to Fight Unemployment If the real GDP is below potential GDP (recessionary gap) decrease taxes and/or increase gov‘t spending Decreasing taxes increase in consumption/investment Increasing government spending Result: increase in AD (shifts right) increase in real GDP (. ..back up to potential GDP)
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Using Expansionary Fiscal Policy to Fight Unemployment ( left graph )
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Using Contractionary Fiscal Policy to Alleviate Inflationary Pressures If real GDP is above potential GDP (inflationary gap) self-correction mechanism would lead to (cost-push) inflation
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Unformatted text preview: To prevent that: govt can increase taxes and/or decrease spending Result: decrease in AD (shifts left) decrease in real GDP (. ..back down to potential GDP; but: without producing inflation) Using Contractionary Fiscal Policy to Alleviate Inflatioary Pressures (right graph) Problems Associated with Discretionary Fiscal Policy Crowding Out : increase in government spending decrease in investment (as govt and business compete for funds increase the price of funds discourages some investment) Expansionary Bias Time Lags Recognition Lag Implementation Lag Impact Lag...
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Chapter 12 Practice - To prevent that: govt can increase...

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