EC140 Lecture Notes - Lecture 11: Longrun, Aggregate Demand, Human Capital
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From the sort-run to the long-run fiscal policy and investment. Government spending and tax policy affect the ad curve. May work faster than economic adjustment process. For recessionary gaps, fiscal policy: increases aggregate demand, may work faster than economic adjustment process. For inflationary gaps: decreases aggregate demand, limits the increase in the price level. Fiscal policy is using government spending and/or net taxes to influence the aggregate economy. Net tax rates, t, act to reduce the multiplier. Automatically limits the effects of aggregate demand shocks (positive or negative) Some specific automatic mechanisms in canada: increasing marginal tax rates, employment insurance/welfare systems. Changing fiscal policy is the work of government. May result in months of delay in enacting policy. Execution lags longer for spending than for tax changes ( shovel-ready projects) Permanent tax changes have a larger effect than temporary ones.