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