Economic Policy and the Aggregate Demand-Supply model Lesson 28 Sections 20, 21

Macroeconomic Policy (20) Stabilization Markets can remain irrational longer than you can stay solvent (Keynes) Policy in the Face of Demand Shocks Price Stabilization Inflationary worries Responding to Supply Shocks Stagflation

Fiscal Policy: The Basics Taxes Government Purchases Transfers (poor term) / Social Insurance Social Security Medicare Medicaid Borrowing Crowding Out

Expansionary and Contractionary Fiscal Policy Expansionary Policies Increase Government Purchases Cut Taxes Increase in Government Transfers Contractionary Policies Reduction in Government Purchases Increase Taxes Reduction in Government Transfers Time Lags

Fiscal Policy and the Multiplier (21) Multiplier Effect on Government Purchases 1/(1-MPC) *Marginal Propensity to Consume Adding spending will add more than the initial amount Decreased spending will reduce GDP by more than the reduction in spending Some activities are much more likely to have a larger multiplier Taxes and the Multiplier Higher taxes reduce the multiplier Automatic Stabilizers Unemployment Insurance Discretionary Fiscal Policy Roosevelt and the Great Depression