Transcript Chapter 33 & 34 - WusslersClassroom

Chapter 33 & 34
Crowding In, Crowding Out,
Phillips Curve, Rational Expectations
Why do recessions add to
national debt?
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When in a recession, we use expansionary
fiscal policy – which means that G spending
increases, taxes decrease, and transfers
increase, thus adding to the national debt
G
T
Tr
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Crowding Out
G spending increases AD, RGDP and PL,
so D for Money increases, due to PL
This increases i rates & MS
The increase in i rates causes a decrease
in I spending which lowers AD
Crowding In
Stimulation in G causes businesses to
gain confidence and produce more to take
advantage of the growing economy
Crowding In & Crowding Out
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Because AD shifts right, the SCM shifts the
AS curve to the left due to a rise in costs of
production, which lowers profitability and AS
The Fed can control i rates using
Expansionary Monetary Policy to bring i rates
down
This will shift AD curve even farther out,
increasing the national deficit
The Fed is buying bonds that the gov’t is
selling to fund their deficit
◦ Fed creates money from government’s debt

Monetizing the debt is more inflationary than
non-monetized debt
Monetizing the Debt
Phillips Curve
Long run
Inflation
SCM
SCM
Short Run
Natural Rate of Unemployment
Unemployment Rate
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How the deficit would look if we were at
full employment and the gov’t receives
as much tax revenue as expected and
spends only as much as expected
Structural Deficit

Use Expansionary Fiscal Policy during a
recession
◦ Creates deficit – Increases G spending,
decreases taxes, increases transfers
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Use Contractionary Fiscal Policy during an
inflation
◦ Decreases G spending, increases taxes,
decreases transfers, which DECREASES THE
DEFICIT and BALANCES THE BUDGET
Costs of Closing
Recessionary/Inflationary Gap
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Forecasts that are the best that can be made
given the available data, not necessarily
correct
If correct, short run PC is vertical
◦ Inflation can be produced without the need for high
unemployment
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Why Keynesians and Liberals want to fight
unemployment:
◦ Believe AD and SR PC curve is flat
◦ Unemployment is more costly than inflation
◦ Expectations react sluggishly, SCM is unreliable and
slow
Rational Expectations
Why Rational Expectation Adherent and
Conservatives are more eager to fight inflation:
- Because AD and SR PC is steep
- Inflation more costly than UE
- Depends on region of AS
- Expectations react quickly
- SCM works smoothly and rapidly
Rational Expectations