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Lecture 19-Fiscal policy.pdf

Lecture 19-Fiscal policy.pdf - 30-Jan-18 MACROECONOMICS...

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30-Jan-18 1 MACROECONOMICS LECTURE 19 FISCAL POLICY CONTENTS OF THE LECTURE 1. What have we learned about fiscal policy so far? 2. Links between budget deficit and government debt 3. Budget deficit and government debt in the UK CONTENTS OF THE LECTURE 1. What have we learned about fiscal policy so far? 2. Links between budget deficit and government debt 3. Budget deficit and government debt in the UK
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30-Jan-18 2 1. WHAT HAVE WE LEARNED ABOUT FISCAL POLICY SO FAR? The IS-LM model implies that fiscal expansion (an increase in government expenditures or a decline in taxes) leads to higher output. The AS-AD model implies that when fiscal expansion makes output higher than natural output (or unemployment lower than NAIRU), it leads to inflation. In the medium run, this increase in inflation reduces output. So, fiscal expansion is ineffective in the medium run. Post-Keynesians argue that fiscal expansion is in most cases effective even in
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