Legislative Lag
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Once we've obtained the necessary data and concluded something must
be done, there can be considerable lags in the legislative process as
legislators debate the exact form of the package, or oppose it altogether.
What are the fiscal policy remedies that the Keynesian economist might prescribe to
close a recessionary gap?
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, The prescribed Keynesian remedy for a recessionary gap is Expansionary
Fiscal Policy.
In order to close this gap, a government will typically increase their
spending which will directly increase the aggregate demand curve (since
government spending creates demand for goods and services).
At the same time, the government may choose to cut taxes, which will
indirectly affect the aggregate demand curve by allowing for consumers to
have more money at their disposal to consume and invest. The actions of
this expansionary fiscal policy would result in a shift of the aggregate
demand curve to the right, which would result closing the recessionary gap
and helping an economy grow.
What is Money?
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A Medium of exchange whose most important function is to facilitate
transactions
What is Supply Side Fiscal Policy?
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A policy that involves the use of government spending & taxes to affect the
production (supply) side of the economy.
Ex. Assume U.S. citizens spend 90¢ for every extra $1 they earn. Further assume that
the real interest rate (r%) decreases, causing a $50 billion increase in gross private
, investment. Calculate the effect of a $50 billion increase in IG on U.S. Aggregate
Demand (AD) or AE.
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Step 1: Calculate the MPC and MPS
MPC = ΔC/ΔDI = .9/1 = .9
MPS = 1 - MPC = .10
Step 2: Determine which multiplier to use, and whether it's + or -
The problem mentions an increase in Δ IG .: use a (+) spending multiplier
Step 3: Calculate the Spending and/or Tax Multiplier
1/MPS = 1/.10 = 10
Step 4: Calculate the Change in AD/AE
(Δ C, IG, G, or XN) * Spending Multiplier
($50 billion Δ IG) * (10) = $500 billion ΔAD/AE
Ex. If $500 billion in AE $1000 billion in GDP, then how much would G have to to reach
a YF of $2000 billion?
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Explanation:
1000/500 = 2 = Multiplier = GDP/AE
AE x Multiplier = GDP
G x 2 = 2000
G = 1000
If lowering or raising marginal tax rates are permanent and also have short-run
effects, what effects would this have on the LRAS curve and the SRAS curve and will
lower marginal tax rates provide more or less incentives for people to work more or
less?
Give this one a try later!
Once we've obtained the necessary data and concluded something must
be done, there can be considerable lags in the legislative process as
legislators debate the exact form of the package, or oppose it altogether.
What are the fiscal policy remedies that the Keynesian economist might prescribe to
close a recessionary gap?
Give this one a try later!
, The prescribed Keynesian remedy for a recessionary gap is Expansionary
Fiscal Policy.
In order to close this gap, a government will typically increase their
spending which will directly increase the aggregate demand curve (since
government spending creates demand for goods and services).
At the same time, the government may choose to cut taxes, which will
indirectly affect the aggregate demand curve by allowing for consumers to
have more money at their disposal to consume and invest. The actions of
this expansionary fiscal policy would result in a shift of the aggregate
demand curve to the right, which would result closing the recessionary gap
and helping an economy grow.
What is Money?
Give this one a try later!
A Medium of exchange whose most important function is to facilitate
transactions
What is Supply Side Fiscal Policy?
Give this one a try later!
A policy that involves the use of government spending & taxes to affect the
production (supply) side of the economy.
Ex. Assume U.S. citizens spend 90¢ for every extra $1 they earn. Further assume that
the real interest rate (r%) decreases, causing a $50 billion increase in gross private
, investment. Calculate the effect of a $50 billion increase in IG on U.S. Aggregate
Demand (AD) or AE.
Give this one a try later!
Step 1: Calculate the MPC and MPS
MPC = ΔC/ΔDI = .9/1 = .9
MPS = 1 - MPC = .10
Step 2: Determine which multiplier to use, and whether it's + or -
The problem mentions an increase in Δ IG .: use a (+) spending multiplier
Step 3: Calculate the Spending and/or Tax Multiplier
1/MPS = 1/.10 = 10
Step 4: Calculate the Change in AD/AE
(Δ C, IG, G, or XN) * Spending Multiplier
($50 billion Δ IG) * (10) = $500 billion ΔAD/AE
Ex. If $500 billion in AE $1000 billion in GDP, then how much would G have to to reach
a YF of $2000 billion?
Give this one a try later!
Explanation:
1000/500 = 2 = Multiplier = GDP/AE
AE x Multiplier = GDP
G x 2 = 2000
G = 1000
If lowering or raising marginal tax rates are permanent and also have short-run
effects, what effects would this have on the LRAS curve and the SRAS curve and will
lower marginal tax rates provide more or less incentives for people to work more or
less?
