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Topic: McConnell & Brue
Chapter #12 - Fiscal Policy
1. Management of aggregate supply and aggregate demand or management of equation:
GDP = Aggregate Expenditures.
2. Use to help reach major macroeconomic goals of:
(1) full employment
(2) stable price level
(3) economic growth
II. Two Types of Stabilization Policy
1. Fiscal policy tools
(1) Change government spending
(2) Change taxes
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2. Monetary policy
(1) Change money supply
(2) Effect interest rates
Stabilization Policy can be Expansionary or Contractionary
1. Expansionary - if want to expand economy
(1) fiscal policy -- increase G or decrease T
(2) monetary policy -- increase money supply, decrease interest rate
2. Contractionary -- if want to contract economy
(1) fiscal policy -- decrease G or increase T
(2) monetary policy -- decrease money supply, increase interest rate
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Spending and taxing by government.
1. Types of fiscal policy
(1) Discretionary - Government can set amount of spending and taxing at its
(2) Nondiscretionary - Mechanisms are in place that automatically change
government spending and taxing. Automatic stabilizers.
V. Employment Act of 1946
For the first time, the Federal government assumed responsibility for creating
full-employment, a stable price level, and economic growth.
Macroeconomic Policy Maker Advisory Groups
1. President's Council of Economic Advisers (CEA)
2. Congresses' - Joint Economic Committee (JEC)
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VII. Fiscal Policy
1. Expansionary - Increase "G" or decrease "T"
2. Contractionary - Decrease "G" or increase "T"
VIII. Fiscal Policy within AS-AD Model
If Recession, Use Expansionary FP
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If Inflation, Use Contractionary FP
Problems with Discretionary Fiscal Policy
1. Recognition lag - Takes time to recognize that a problem exists.
2. Administrative lag - Takes time to get government fiscal machinery working.
3. Operational lag - Takes time for fiscal policy to take effect.
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