ECON 102 Lecture Notes - Lecture 11: Output Gap, Business Cycle
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E. g. an increase in productivity: sr models are basically stabilization models - eliminate gaps by changing actual y (gapbusters) E. g. an increase in g to eliminate a recession. Three methods to eliminate gaps: do nothing - let the adjustment process push y to y, supply side economics - mountain to mohammed, kickback - fiscal/monetary policy to hasten y to y* The real challenge of fiscal policy: the direction is easy, timing, magnitude, and mixture are the challenge, stabilization policy. Initially at y < y* recessionary gap. Adjust process: wages fall costs fall sras increases. Faster: policy induced increase ad (shift to right) Note: a natural revival in c can increase ad also. Adjust process: wages rise costs rise sras decreases. Faster: policy induced decreased ad (shift to left) Initially at y > y* inflationary gap. Decrease g and/or increase t (contractionary fiscal policy) The natural tendency is for individual to increase savings.
