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Lecture 7

ECON 203 Lecture 7: chapter 14
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Department
Economics
Course Code
ECON 203
Professor
Strow

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Description
Fiscal Policy Recessionary Gap- raise government spending or cut taxes (expansionary) - Buy more goods at higher prices, demand for $ goes up - Increase in interest rates more foreigners want to put money in $ o Value of $ goes up- hurts exporters, helps importers - AD’’ chokes of AD’ growth because we decrease our net exports o Kickback gets bigger as US economy gets more integrated - “As the US economy becomes more globalized, fiscal policy becomes a weaker tool” Inflationary Gap- lower government spending or raise taxes (contractionary) - Buy fewer goods, prices are lowered- demand for $ falls and so does the interest rate value of currency goes down - Increase in net exports because of weaker dollar- creates inflation by going to AD’’ Need larger amounts of fiscal policy to get the same effect as the past- hurts long term economic growth Monetary Policy Inflationary Gap- Fed sells bonds banks call in loans - Decreases money supply, raise interest rates to choke off investment - Buy fewer goods at lower prices- demand for $ falls o Interest rates actually decrease a little bit because shift in money supply is larger than the shift in money demand - More people want dollars, fewer americans want to dump dollars- value increases- net exports decreasing decreases us to AD’’ - “As US economy becomes more globalized, monetary policy becomes a stronger tool.”  25% of economy is importing and exporting- do not need as much policy to change the economy Recessionary Gap- Fed buys bonds banks give out loans (expansionary) - Increase in money supply - Reduce interest rates to incentivize investment o Have to make sure it is good investment- cannot just have people building houses like we did in 2001 - Increase money demand- interest rates raise a little bit - Lower interest rates- fewer foreigners want it, Americans dump currency- value of $ falls cheaper dollar, increases net exports, increases AD - Increase AD- lower interest rates, lower value of $, export more things abroad General Equilibrium Theory- The reason that the dollar appreciates is because the European Central Bank is depreciating the Euro faster than we are depreciating the dollar monetary policy doesn’t really work in this case Recessionary Gap - Self-correction: increase AD- wages are shifted down as workers are put on sale - Fiscal: cutting taxes, raising government spending - Monetary- buying bonds Pros of Expansionary Fiscal Policy 1. Quick fix 2. Lowers unemployment 3. Politically connected do wel
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