Macroeconomics
The different short-run effects of combining fscal and monetary policies are summarized in table 4 whereby G = government spending, C = consumption, AD = aggregate demand, Ms = money supply, i = interest rate, UR = unemployment rate, and PL = price level.
Table 4: Effects of Fiscal and Monetary Policies on the Economy
Expansionary Monetary Policy
Contractionary Monetary Policy
Type of Policy
Expansionary Fiscal Policy
G and/or C↑→ AD↑ Ms↑ → i↓ → AD↑ Output↑, UR↓, PL↑
G and/or C↑→ AD↑ Ms↓ → i↑ → AD↓ Output, UR, PL? (Indeterminate)
Contractionary Fiscal Policy
G and/or C↓→ AD↓ Ms↑ → i↓ → AD↑ Output, UR, PL? (Indeterminate)
G and/or C↓→ AD↓ Ms↓ → i↑ → AD↓ Output↓, UR↑, PL↓
The effects on output, the unemployment rate, and the price level areindeterminatewhenfscaland monetary policies work in opposite directions. This is because the effects depend on theintensityof each policy, which may offset the other. J. Infation and Unemployment Economists havealwaysanalyzedtherelationshipbetweeninflationandunemploymenttounderstand how changes in one affect the other. They have also studied how government policies designed to reduce unemployment impact both the unemployment and inflation rates. The most famous study of the relationship between unemployment and inflation was published by economistBillPhillipswhodevelopedthe Phillipscurvemodel thatplotstheunemploymentrateonthe horizontalaxisandtheinflationrateontheverticalaxis.Thismodelwasthenimprovedtodifferentiate between the relationship between inflation and unemployment in the short and the long run and illustrate the effect of macroeconomic shocks on inflation and unemployment. This is why economic theory uses two Phillips curves: the short-run Phillips curve and the long-run Phillips curve. The Phillips Curve: Short Run vs. Long Run The Short-Run Phillips Curve (SRPC) The short-runPhillipscurve(SRPC) isaconceptinmacroeconomicsthatsuggests thereisaninverse relationshipbetweentheinflationrateandtheunemploymentrate .Thismeansthatwheninflationis low,unemploymenttendstobehigh,andviceversa. Thisindicatesatrade-off thatpolicymakersoften facewhentryingtomanagetheeconomy.Thisinverserelationshipisillustratedbyadownward-sloping SRPC.
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