Lecture-12-13-slides

Lecture-12-13-slides - 1 Lecture 12: AE Model to AD-AS...

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Unformatted text preview: 1 Lecture 12: AE Model to AD-AS Model and Fiscal Policy Reference: Appendix to Chapter 8 and Chapter 9 LEARNING OBJECTIVES 1. Derivation of AD curve from the AE Model. 2. What fiscal policy is and what it is used for. 3. About the economys built-in stabilizers. 4. The problems, criticisms, and complications of fiscal policy. 2 I. Introduction A. One major function of the government is to stabilize the economy (prevent unemployment or inflation). B. Stabilization can be achieved in part by manipulating the public budget government spending and tax collectionsto increase output and employment or to reduce inflation. II. Fiscal Policy and the AD/AS Model A. Discretionary fiscal policy refers to the deliberate manipulation of taxes and government spending by Parliament to alter real domestic output and employment, control inflation, and stimulate economic growth. 3 Discretionary means the changes are at the option of the Federal government. B. Simplifying assumptions: 1. Assume initial government purchases dont depress or stimulate private spending. 2. Assume fiscal policy affects only demand, not supply, side of the economy. C. Fiscal policy choices: Expansionary fiscal policy is used to combat a recession (see examples illustrated in Figure 9-1). 1.Expansionary Policy needed: In Figure 9-1, a decline in investment has decreased AD from AD 1 to AD 2 so real GDP has fallen and also 4 employment declined. Possible fiscal policy solutions follow: a. An increase in government spending (shifts AD to right by more than change in G), b.A decrease in taxes (AD shifts to right by a multiple of the change in consumption). c. A combination of increased spending and reduced taxes. d.If the budget was initially balanced, expansionary fiscal policy creates a budget deficit....
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This note was uploaded on 06/20/2009 for the course ECN 204 taught by Professor Unknown during the Spring '09 term at Ryerson.

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Lecture-12-13-slides - 1 Lecture 12: AE Model to AD-AS...

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