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20. Module Economic Policy and the Aggregate Demand-Aggregate Supply Model odel. KRUGMAN'S MACROECONOMICS for AP*. Margaret Ray and David Anderson. What you will learn in this Module :. How the AD-AS model is used to formulate macroeconomic policy The rationale for stabilization policy - PowerPoint PPT Presentation
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ModuleEconomic Policy and the Aggregate Demand-Aggregate Supply Model
odelKRUGMAN'S
MACROECONOMICS for AP*
20
Margaret Ray and David Anderson
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
• Self-correction?
• Stabilization Policy
Macroeconomic PolicyMacroeconomic Policy
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?
Responding to Supply Responding to Supply ShocksShocks
• Supply shock
• Policy dilemma
Fiscal Policy: The BasicsFiscal Policy: The Basics
Taxes, Government Purchases of Goods Taxes, Government Purchases of Goods and Services, Transfers, and Borrowingand Services, Transfers, and Borrowing
Taxes, Government Purchases of Goods Taxes, Government Purchases of Goods and Services, Transfers, and Borrowingand Services, Transfers, and Borrowing
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
Expansionary and Expansionary and Contractionary Fiscal PolicyContractionary Fiscal Policy
• Expansionary Fiscal Policy
• increase G
• decrease T
• increase transfers
Expansionary and Expansionary and Contractionary Fiscal PolicyContractionary Fiscal Policy
• Contractionary Fiscal Policy
• decrease G
• increase T
• decrease transfers
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
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