Textbook Notes (368,611)
Canada (162,009)
Economics (923)
ECN 204 (282)
Amy Peng (21)
Chapter 1

Chapter 1

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ECN 204
Amy Peng

Chapter 11 Fiscal policy and the AD-AS model *fiscal policy: changes in government spending and tax collections designed to achieve a full-employment and non-inflationary domestic output. • Expansionary fiscal policy o Expansionary fiscal policy: an increase in government spending, a decrease in net taxes, or some combination of the two, for the purpose of increasing aggregate demand and expanding real output; o Budget deficit: the amount by which the expenditures of the federal government exceed its revenues in any year o Three main options: (1) increased government spending: Increase in government spending will shift an economy’s aggregate demand curve tot the right. • Through the multiplier effect, the AD shifts to the right, because the multiplier process magnifies the initial change in spending into successive rounds of new consumption spending o The aggregate demand curve shifts the original investment rightward times the multiplier (2)Tax reduction • Reduce taxes shift AD to the right • The smaller the the MPC the greater the tax must be to accomplish a specific initial increase in consumption. (3)combined government spending increases and tax reductions • Rightward shifts of AD increase of aggregate expenditures • Contractionary fiscal policy www.notesolution.com o Contractionary fiscal policy: a decrease in government spending, and increase in net taxes, or some combination of the two for the purpose of decreasing aggregate demand and thus controlling inflation o Budget surplus: the amount by which the revenues of the federal government exceed its expenditures in any year o Three main options: (1)Decreased government spending • Reduced government spending shifts the AD to the left. • Ratchet effect: the price is stuck at the now increased priced that was caused by the original rightward shift in AD • ^ to fix this problem: o Take into account the size of the inflationary GDP gap. o Price level is fixed, aggregate supply will be horizontal, multiplier is in full effect o Decline the spending enough for the multiplier to be used to rid of the gap. (2)Tax Increases: use tax increases to reduce consumption spending.
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