Fiscal Policy Chapter 12

Chapter 12 Figure 12.1 Expansionary Fiscal Policy: Battling Recession/Depression

Chapter 12 Figure 12.2 Contractionary Fiscal Policy: Battling Demand-pull Inflation

Chapter 12 Figure 12.3 Automatic Stabilizers

Chapter 12 Figure 12.4(a) A Full-employment Balanced Budget in a Recession

Chapter 12 Figure 12.4(b) Expansionary Fiscal Policy: a Full-employment Deficit in Response to a Recession

Chapter 12 Table 12.1

Chapter 12 Figure 12.5(a) The AE Multiplier in the Absence of Crowding Out or the Net Export Effect

Crowding Out Running a Government Deficit requires the Government to Borrow more Money by issuing More Bonds To get Investors to Buy More Bonds, the Government must Offer a Higher Interest Rate The Higher Interest Rate Lowers Private Investment Spending (Crowding Out of Private Investment) Lowering the AE, shifting the AD curve to the left Exactly the opposite of what was intended

The Net Export Effect The Higher Interest Rate in the U.S. makes the dollar more valuable as an investment asset The foreign exchange value of the dollar rises Making U.S. exports more expensive (X falls) The foreign exchange value of foreign currencies falls Making imports into the U.S. cheaper (M rises) X n = X – M falls!

Chapter 12 Figure 12.5(b)

Chapter 12 Table 12.2