Macroeconomics
policy aiming to increaseAD(shiftingitscurvetotheright)untiltheshort-runequilibriumreachesthe fullemploymentlevel(intersectionofAD-SRAS-LRAS).Consequently,thispolicycanleadtoinflationas unemployment decreases and output increases. The expansionary fscal policy tools that increase aggregate demand are increasing government spending and decreasing taxes.
The impact of an increase in government spending on aggregate demand is direct since G is a component of AD. However, a decrease in taxes has an indirect effect on AD because it increases households’ disposable incomes and/or frms’ profts. Consequently, consumption and/or investment increase, resulting in a rightward shift of the AD curve.
↑G → AD ↑ → real GDP ↑ → price level ↑ and/or
↓T → C ↑ and/or I↑ → AD ↑ → real GDP ↑ → price level ↑
Study Tip Donotconfusefscalwithmonetarypolicy.Anincreaseingovernmentspending, ceterisparibus ,does not affect money supply; it affects aggregate demand. Changes in money supply are caused by monetary policy tools. Contractionary Fiscal Policy In times of peak, economies may experience inflation reflected by an inflationary gap on the AD-AS model. This means that the short-run equilibrium is above the full employment level resulting in inflationary pressures. Recall that demand-pull inflation is a general increase in the price level causedbyexcessiveaggregatedemand thatcannotbemetwiththecurrentproductionlevels.Toclose
153
© 2024 ACHIEVE ULTIMATE CREDIT-BY-EXAM GUIDE|MACROECONOMICS
Made with FlippingBook - Online Brochure Maker