policy - E202 - Policy POLICY EFFECTS Short-Run...

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E202 - Policy 1 POLICY EFFECTS Short-Run Expansionary policy raises aggregate demand. Fiscal policy G ! " AD ! tr # " Y d ! " C ! " AD ! Monetary policy RS " # i $ => I " , C " % E $ => EX " , IM $ As aggregate demand increases output and employment rise. W L SRLS LD Eventually this economic expansion will put upward pressure on wages and prices.
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E202 - Policy 2 Long-Run When wages and prices have adjusted fully, output and employment will be at their long-run level (potential GDP). P Q LRAS AD Q W L LRLS LD L Composition of Output Monetary policy has no lasting effects on the composition of output. Expansionary fiscal policy causes a “crowding out” effect. Increase in expenditures causes reduction in consumption, investment, and/or net exports. G ! " C + I + X ( ) # given Q = Q [ ] Tax cuts raise consumption and crowd out other private spending. T ! " C # " I + X ( ) ! given G , Q = Q [ ]
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E202 - Policy 3 Fiscal crowding out occurs due to financial market adjustment. Open Economy Fiscal stimulus reduces national saving, leading to larger gap between domestic saving and investment, and consequently a larger trade deficit. I
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This note was uploaded on 03/30/2010 for the course ECON-E 202 taught by Professor Nahn during the Spring '08 term at Indiana.

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policy - E202 - Policy POLICY EFFECTS Short-Run...

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