chapte14 - Chapter 14: Aggregate Demand Policy in...

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Chapter 14: Aggregate Demand Policy in Perspective I. Supply versus Demand Policy A. Supply-Side policies such as tax breaks or subsidies designed to expand 1. Increase Capital Stock (amount of physical capital in the economy) 2. Shift both short-run and long-run AS curves to the right due to: a. Overall capacity of capital is increased b. Increased capital improves productivity of other factors 3. Are intended for long-term benefit, including a tradeoff of more future consumption goods for fewer current consumption goods. B. Demand side policies 1. Are meant to address overcapacity in an economy that is below potential output 2. Increase current consumption of consumer goods (increasing AD) II. Fiscal Policy problems A. Offsets to fiscal policy are described by the concept of: Crowding Out B. (lack of/insufficient) knowledge of key benchmarks is problematic. Assessing levels of : 1. Potential GDP (and by implication the target employment rate) 2. MPE (mpc) 3. “The current situation” i.e. the direction and momentum of the current economic cycle are difficult to determine. C. Ease with which G can increase and T can decrease (political/constituent popularity) and the converse: the difficulty of decreasing G or increasing T D. Economic drags from a large public debt (national debt)
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chapte14 - Chapter 14: Aggregate Demand Policy in...

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