Transcript BU204 - Macroeconomics

BU204 - Macroeconomics
Unit 7 Seminar
Key Terms Assignment
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Potential Output
Recessionary gap
Expansionary fiscal policy
Inflationary gap
Contractionary fiscal policy
Automatic stabilizers
Unit 7 - Key Concepts
• Basics of Fiscal Policy
– Taxes, Purchases, Transfers, and Borrowing
• Expansionary Fiscal Policy
– Shift AD right to close a recessionary gap.
• Increase purchases
• Cut taxes
• Increase transfers
• Contractionary Fiscal Policy
– Shift AD left to close an inflationary gap.
• Reduce purchases
• Increase taxes
• Reduce transfers
• Lags in Fiscal Policy
• The Multiplier Effect (Purchases):
– Extra increase in GDP do to a increase in
government spending.
– Multiplier = 1 / (1-MPC)
• Government Budget
– Surpluses
– Deficits
• Long-Run Implications of Fiscal Policy
– Debt
– Debt-GDP Ratio
Unit 7 Assignment
Chapter 12 Question 3: 3.
• An economy is in long-run macroeconomic equilibrium when each of the
following aggregate demand shocks occurs. What kind of gap — inflationary or
recessionary — will the economy face after the shock, and what type of fiscal
policies would help move the economy back to potential output?
• a. A stock market boom increases the value of stocks held by households.
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b. Firms come to believe that a recession in the near future is likely.
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c. Anticipating the possibility of war, the government increases its purchases of
military equipment.
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d. The quantity of money in the economy declines and interest rates increase.