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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