CH 16

Aggregate Demand and Aggregate Supply Model An extension of the basic​ AD-AS model that introduces the following​ conditions:

1. The economy experiences continuing​ inflation, with the price level rising every year. 2. The economy experiences​ long-run economic​ growth, with the LRAS curve shifting to the right every year.

In the dynamic​ AD-AS model we​ assume:

1. The economy experiences inflation​ and, 2. the economy experiences long run growth. That​ is, the LRAS curve shifts to the right each year. In​ addition, the AD and the SRAS curves also shift to the right each year.

Crowding out

A decline in private expenditures as a result of an increase in government purchases

What is a contractionary fiscal​ policy?

Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.

What is an expansionary fiscal​ policy?

Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.

What is fiscal​ policy?

Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.

What is the difference between federal government purchases​ (spending) and federal government​ expenditures?

Government purchases are included in government expenditures.

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

Who is responsible for fiscal​ policy?

The federal government controls fiscal policy.

Automatic stabilizers are

government spending and taxes that automatically increase or decrease along with the business cycle.

Which of the following raises the largest percentage of federal government​ revenue?

individual income taxes

As a result of crowding out in the short​ run, the effect on real GDP of an increase in government spending is often

less than the increase in government spending.

Two examples of automatic stabilizers in the U.S. are

unemployment insurance payments and the progressive income tax system.

Automatic stabilizers can reduce the severity of a recession​ because, during a​ recession,

unemployment payments rise and tax collections​ fall, providing more spending ability to push the economy back to full employment.