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ModuleEconomic Policy and the Aggregate Demand-Aggregate Supply Model
odelKRUGMAN'S
MACROECONOMICS for AP*
20
Margaret Ray and David Anderson
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What you will learnWhat you will learn
in thisin this ModuleModule::
• How the AD-AS model is used to formulate macroeconomic policy
• The rationale for stabilization policy
• Why fiscal policy is an important tool for managing economic fluctuations
• Which policies constitute expansionary fiscal policy and which constitute contractionary fiscal policy
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• Self-correction?
• Stabilization Policy
Macroeconomic PolicyMacroeconomic Policy
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Policy in the Face of Policy in the Face of Demand ShocksDemand Shocks
• Negative Demand Shocks & Positive Demand Shocks
• Why are they bad?
• Should policymakers counteract?
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Responding to Supply Responding to Supply ShocksShocks
• Supply shock
• Policy dilemma
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Fiscal Policy: The BasicsFiscal Policy: The Basics
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Taxes, Government Purchases of Goods Taxes, Government Purchases of Goods and Services, Transfers, and Borrowingand Services, Transfers, and Borrowing
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Taxes, Government Purchases of Goods Taxes, Government Purchases of Goods and Services, Transfers, and Borrowingand Services, Transfers, and Borrowing
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The Government Budget and Total The Government Budget and Total SpendingSpending
• GDP = C + I + G + X - M
• The effect of taxes and transfers
• Effects on Investment
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Expansionary and Expansionary and Contractionary Fiscal PolicyContractionary Fiscal Policy
• Expansionary Fiscal Policy
• increase G
• decrease T
• increase transfers
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Expansionary and Expansionary and Contractionary Fiscal PolicyContractionary Fiscal Policy
• Contractionary Fiscal Policy
• decrease G
• increase T
• decrease transfers
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A Cautionary Note: Lags in Fiscal A Cautionary Note: Lags in Fiscal PolicyPolicy
• Time lags
• Recognition lag
• Decision lag
• Implementation lag
• Lags make decision making more difficult