Notesale: Turn your study into money

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Macroeconomics

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Chapter 28 -P1
Cost Shocks in the AD/AS Model
Fiscal Policy Effects
Fiscal policy affects the goods market through :
changes in: taxes and government spending
A-Expansionary fiscal policy:a decrease in net taxes and an increase in government spending increase output (Y)
...

The objective of an expansionary fiscal policy is to:
reduce unemployment
...

Both result in a shift of the AD curve to the left
...

AS

P

AD0
AD1
Y

1

Macroeconomics

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1-A Shift of the AD Curve When the Economy is on the Nearly Flat Part of
the AS Curve

1-This is the case in which an expansionary fiscal policy works well
...

3-When the economy is producing on the nearly flat portion of the AS curve, firms are
producing well below capacity, and they will respond to an increase in demand by
increasing output much more than they increase prices
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2

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2-A Shift of the AD Curve When the Economy is Operating at or Near
Capacity

1-Here, an expansionary fiscal policy does not work well
...

2-Output is initially close to capacity(full employment), this lead to that increase output
further mostly lead to a higher price level
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4-If the shift in the AD curve caused by a decrease in net taxes, it is consumption,
Not government spending that causes the crowding out of investment
...
In this case it is easy to see that fiscal policy will have no effect on output
because output multiplier equal zero

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