ECO100Y5 Lecture Notes - Lecture 12: Fiscal Policy, Aggregate Demand, Output Gap
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ECO100Y5 Full Course Notes
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Fiscal policy: government decisions about the level of taxation and public spending. Fiscal policy affects the economy by increasing or decreasing aggregate demand. Shifts in the aggregate demand curve translate into higher or lower output and price levels throughout the economy. Aggregate demand affects both real output and the price level in the short run. The economy is limited by a supply constraint in the long run: fiscal policy affects aggregate demand using: Directly affects g, indirectly affect i and c. Due to multiplier, the required increase in g to close a recessionary output gap is smaller than output gap itself. T decreases -> disposal income(y-t) increases (workers take home more money) -> c increases -> ad increases. Note: how much individuals consume is related to their incomes. But before anyone gets a paycheque, the government takes some money in taxes. Consumption therefore depends not on total income but rather on disposable income what"s left after taxes.