ECON 203 Lecture Notes - Lecture 17: Potential Output, Real Interest Rate, Government Spending
6 Aug 2015
School
Department
Course
Professor
Document Summary
Econ 203: principles of macroeconomics - lecture 17: more on fiscal policy. For multiple reasons, fiscal policy may be an even less effective stabilization tool than monetary policy. Accurately timing fiscal policy is much harder because of: Legislative delay: congress is required to agree upon the actions before they are implemented. Implementation delay: large spending projects may take months or even years to begin, even once approved. Government spending might crowd out private spending. Crowding out: a decline in private expenditures as a result of an increase in government purchases. A temporary increase in government purchases will cause the demand for money, and therefore the interest rate, to rise. However, with the higher interest rate, consumption, investment spending, and net exports will fall. So the initial spending is partially offset by the crowding out. The demand curve will initially shift to the right until it is at equilibrium.
