ECON-E 202 Lecture Notes - Lecture 18: Output Gap, Aggregate Demand, Price Level
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FISCAL POLICY
Government Spending & Taxes
Lecture 3/20
Discretionary Fiscal Policy
Changes in expenditure and/or taxes in order to achieve certain national economic goals
High employment
Price Stability
Economic Growth
Improvement of international Payments
Keynesian Response
Changes in government spending (G): if increased it will stimulate the economy, if
decrease it will cause the economy to contract
*comes from military spending, education, infrastructure etc
Things that affect SRAS (what keynes focuses on)- INPUT PRICES
SRAS will increase with increasing G, this will increase aggregate demand, real
GDP, price level, and employment
EXAMPLE: you have a recessionary gap of 700, the MPC is .8 How much do you need to change
G by to close the gap?
It's recessionary so you are going to be increasing G
1. Find the multiplier: (1/(1-MPC)) aka (1/.2) aka 5
2. Change in RGDP = multiplier X change in autonomous G
a. 700 = 5 X change
b. 700/5=change
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Document Summary
Changes in expenditure and/or taxes in order to achieve certain national economic goals. Changes in government spending (g): if increased it will stimulate the economy, if decrease it will cause the economy to contract. Things that affect sras (what keynes focuses on)- input prices. Sras will increase with increasing g, this will increase aggregate demand, real. Example: you have a recessionary gap of 700, the mpc is . 8 how much do you need to change. It"s recessionary so you are going to be increasing g: find the multiplier: (1/(1-mpc)) aka (1/. 2) aka 5, change in rgdp = multiplier x change in autonomous g, 700 = 5 x change, 700/5=change, 140= change. Increase in autonomous g leads to increase in ad. The multiplier effect increases ad further than just the increase in auto g. Things that change ad: consumption, investment, net exports. You re multiplier will change because the persons amount of income effects their mpc & mps.
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Related Questions
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b) | The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that
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c) | Stagflation arises in the context of the AD-AS model when some external factor causes
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d) | If the SRAS curve is positively sloped, then a decrease in the demand for Canadian-made goods in Europe will lead to _____ in the price level, in the short run.
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e) | Which of the following will shift the aggregate demand curve to the right?
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f) | Suppose a stock market crash decreases the stock of household wealth and therefore causes autonomous consumption to fall. Which of the following is the likely result?
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g) | An economy is characterized by the AD equation P = 200 ? 0.02Y, SRAS equation P = 100 and LRAS equation Y* = 5000. In the absence of any change in policy or exogenous shocks, this economy will achieve a long-run price level of
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h) | The AD-AS model depicts a self-correcting economy. This means that the price level in the model adjusts automatically in response to a(n) _____ gap, so as to eliminate the _____ gap in the long run, without requiring any help from government policies.
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i) | The aggregate demand curve shows
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j) | Consider an economy initially at long-run equilibrium with output (Y) equal to potential output (Y*). If the SRAS is positively sloped, then a shift to the right of the AD curve will lead to _____ in the price level, in the short run. In the long run, the SRAS curve will shift to the _____ and the equilibrium will be at __________.
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