EXHIBIT 2 Using Government Spending to Combat a Recession 21 EXHIBIT 2 Using Government Spending to Combat a Recession A S A D 2 A D 1 1 5 6 . E 2 P r i c e l e v e l ( C P I , 1 5 6 E 1 9 8 2 – 1 9 8 4 X = 1 ) F u l e m p o y n t 6 . 2 R e a l G D P ( t r i l l i o n s o f d o l l a r s p e r y e a r ) C A U S A T I O N C H A I N I n c r e a s e i n I n c r e a s e i n I n c r e a s e i n t h e g o v e r n m e n t t h e a g g r e g a t e p r i c e l e v e l a n d s p e n d i n g d e m a n d c u r v e t h e r e a l G D P

EXHIBIT 4 Using Fiscal Policy to Combat Inflation 21 EXHIBIT 4 Using Fiscal Policy to Combat Inflation A S A D 1 A D 2 E 1 P r i c e l v ( C I , 1 9 8 2 – 4 = ) 1 6 E ¢ E 2 1 5 5 F u l e m p o y n t 6 6 . 1 R e a l G D P ( t r i o n s f d p y ) C A U S A T I O N C H A I N D e c r e a s e i n D e c r e a s e i n D e c r e a s e g o v e r n m e n t s p e n d i n g t h e a g g r e g a t e i n t h e o r i n c r e a s e i n t a x e s d e m a n d c u r v e p r i c e l e v e l

EXHIBIT 5 Automatic Stabilizers 21 EXHIBIT 5 Automatic Stabilizers 1 , 2 5 T G 1 , G o v e r n m e n t B u d g e t f i c B u d g e t s r p l s p e n d i n g a n d t a x e s 7 5 ( b i l l i o n s o f d o l l a r s p e r y e a r ) 5 2 5 4 6 8 R e a l G D P ( t r i l l i o n s o f d o l l a r s p e r y e a r ) C A U S A T I O N C H A I N I n c r e a s e T a x c o l l e c t i o n s r i s e B u d g e t s u r p l u s i n r e a l a n d g o v e r n m e n t o f f s e t s G D P t r a n s f e r p a y m e n t s f a l l i n f l a t i o n D e c r e a s e T a x c o l l e c t i o n s f a l l B u d g e t d e f i c i t i n r e a l a n d g o v e r n m e n t o f f s e t s G D P t r a n s f e r p a y m e n t s r i s e r e c e s s i o n

EXHIBIT 6 Keynesian Demand-Side versus Supply-Side Effects 21 EXHIBIT 6 Keynesian Demand-Side versus Supply-Side Effects ( a ) D e m a n d - s i d e f i s c a l p o l i c y ( b ) S u p p l y - s i d e f i s c a l p o l i c y A S A S 1 A D 2 2 5 2 5 E 2 A D 1 A D A S 2 2 2 P r i c e l v ( C I , 1 9 8 2 – 4 = ) E 1 P r i c e l v ( C I , 1 9 8 2 – = ) l E 1 1 5 1 5 4 E 2 1 1 5 5 F u l e m p o y n t F u l e m p o y n t 2 4 6 8 1 2 4 6 8 1 R e a l G D P R e a l G D P ( t r i l l i o n s o f d o l l a r s p e r y e a r ) ( t r i l l i o n s o f d o l l a r s p e r y e a r ) C A U S A T I O N C H A I N C A U S A T I O N C H A I N I n c r e a s e i n D e c r e a s e i n r e s o u r c e g o v e r n m e n t I n c r e a s e i n p r i c e s ; t e c h n o l o g i c a l I n c r e a s e i n s p e n d i n g ; t h e a g g r e g a t e a d v a n c e s ; d e c r e a s e i n t h e a g g r e g a t e d e c r e a s e d e m a n d c u r v e t a x e s ; s u b s i d i e s ; d e c r e a s e s u p p l y c u r v e i n t a x e s i n r e g u l a t i o n s

EXHIBIT 7 How Supply-Side Fiscal Policies Affect Labor Markets 21 EXHIBIT 7 How Supply-Side Fiscal Policies Affect Labor Markets B e f o r - t a x c u l b s p y L a b o r d e m n A f t e r - a x c u l b o s p y W E 1 1 W a g e r a t e ( d o l l a r s p e r h o u r ) W E 2 2 L L 1 2 Q u a n t i t y o f l a b o r ( h o u r s p e r y e a r )

EXHIBIT 8 Supply-Side versus Keynesian Demand-Side Effects of Tax Cuts 21 EXHIBIT 8 Supply-Side versus Keynesian Demand-Side Effects of Tax Cuts S u p l y - s i d e o c K e y n s i a p o l c T a x r t e c u s T a x r t e c u s H i g h e r d s p o a b l n c m t w k ’ v u H i g h e r d s p o a b l n c m y f F i r m s n v e t o a d c w u h j b p P e o p l s n d x t r a i c m g v A g r e a t s u p l y c v i n A g r e a t d m n c u v i s E c o n m y e x p a d s , l t r i f u E c o n m y e x p a d s , l t r i b u f