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Chapter 12 Practice - To prevent that gov‘t 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: gov‘t 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 gov‘t 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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