Aggregate supply will decrease which will decrease prices further Production

Aggregate supply will decrease which will decrease

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Aggregate supply will decrease, which will decrease prices further Production possibilities and long-run aggregate supply Economic growth is illustrated by either an outward shift on the production possibilities curve or a rightward shift in the long run aggregate supply curve As the curves shift, they will lead to price increases at a new equilibrium level Downloaded by Ryan L. ([email protected]) lOMoARcPSD|4821790
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48 Recessionary and inflationary gaps in the AD-AS model Ongoing inflation in the long-run AD-AS model Modern economies tend to experience positive rates of inflation due to: Economic growth causing rightward shifts of the AS curve Central banks then cause rightward shifts of the AD curve so that it proceeds just a little faster than the deflationary rightward shifts of the AS curve The net effect is (usually) a small positive rate of inflation Depicting Canadian growth in the long-run AD-AS model To manage inflation, the Bank of Canada uses monetary policy to shift the aggregate demand curve to the right faster than the supply factors of economic growth shift the long-run aggregate supply curve to the right Long-run AD-AS model Economic growth causes increases in long-run aggregate supply Whether deflation, or inflation accompanies growth depends on the extent to which aggregate demand increases relative to aggregate supply Any inflation that occurs is the result of growth of aggregate demand It is not the result of the growth of real GDP Downloaded by Ryan L. ([email protected]) lOMoARcPSD|4821790
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49 Fiscal Policy, Deficits, Surpluses, and Debt Discretionary fiscal policy: expansionary and contractionary Expansionary fiscal policy Used when recession occurs Options: Increased government spending Tax reductions Combined government spending increases and tax reductions May create a budget deficit Contractionary fiscal policy Used to combat demand-pull inflation Options: Decreased government spending Increased taxes Combined government spending decreases and tax increases Policy options: G or T? To expand the size of government If recession, then increase government spending If inflation, then increase taxes To reduce the size of government If recession, then decrease taxes If inflation, then decrease government spending Downloaded by Ryan L. ([email protected]) lOMoARcPSD|4821790
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50 Built in stabilizers Built-in stability Net tax revenues vary directly with GDP Taxes rise when GDP rises, and vice versa Transfer payments fall when GDP rises, and vice versa Leads to automatic stabilization over the business cycle Automatic or built-in stabilizers A structure of taxation and spending that: Increases the deficit (reduces the surplus) during recession Increases the surplus (reduces the deficit) during inflation Economic importance The stabilizers will automatically restrain economic expansion and cushion economic contraction Taxes reduce spending and aggregate demand
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