ipl-logo

Contractionary Fiscal Policy

697 Words3 Pages

3a. After the shock the economy will face an inflationary gap. A contractionary fiscal policy would help to move the economy back to potential output. The policy would shift the aggregate demand curve back to the left after the increased consumer spending moved the curve to the right.
3b. After the shock the economy will face a recessionary gap. An expansionary fiscal policy would help to move the economy back to potential output. The policy would shift the aggregate demand curve back to the right after the decreased investment spending moved the curve to the left.
3c. After the shock the economy will face an inflationary gap. A contractionary fiscal policy would help to move the economy back to potential output. The policy would shift the aggregate demand curve back to the left after the increased government spending moved the curve to the right. …show more content…

After the shock the economy will face a recessionary gap. An expansionary fiscal policy would help to move the economy back to potential output. The policy would shift the aggregate demand curve back to the right after the decreased investment spending moved the curve to the left.

4a. The appropriate fiscal policy response to this situation if the primary concern of the government was to maintain economic growth would be an expansionary fiscal policy. As a result AD1 would shift to the right and the equilibrium point would move to the right, so that it was on the LRAS line again but higher up on that line.
4b.The appropriate fiscal policy response to this situation if the primary concern of the government was to maintain price stability would be a contractionary fiscal policy. As a result AD1 would shift to the left and the equilibrium point would move to the left, so that it was even with P1.
4c. An expansionary fiscal policy would be increase the price level, but would worsen inflation. A contractionary fiscal policy would decrease the price level but as a result it would increase the recessionary

Show More
Related
472 Words | 2 Pages

Shifts the SAS curve downward and the LAS curve outward, resulting in higher real income and a lower price level. d. A reduction in net exports Shifts the AD curve to the left, lowering real income and the price level. 7. Suppose the economy has a recessionary gap. We know that if we do nothing, the economy will close the gap on its own.

Read More
292 Words | 2 Pages

Fiscal policy Following the great recession that lasted between December 2007 and June 2009, the federal government undertook several actions to promote growth and development. The government used a fiscal stimulus package worth $787 billion and a bank bailout measure worth $700 billion. In addition, the government passed the American Recovery and Reinvestment Act of 2009 to help create and save jobs. All these measures helped in providing some form of economic relief against the effects of the recession.

Read More
224 Words | 1 Pages

Expansionary fiscal policy refers to increases in government spending or decreases in taxes or both, so that the net effect on aggregate demand is an increase in net government spending. Contractionary fiscal policy is the complete opposite: increases in taxes or reduced government spending or both, so that the net effect on aggregate demand is a decrease in net government spending. Expansionary policy is utilized when recession phases occur. The contractionary policy will be used at or near the peak of the cycle (business) when the economy reaches full-employment GDP and inflation accelerates may increase. Explain what is meant by a built-in stabilizer and give two examples.

Read More
621 Words | 3 Pages

The main tools available to smooth out the peaks and valleys of an economic cycle include taxes, government spending, the raising and lowering of interest rates, and the tightening or loosening of the money supply. The deployment of each of these tools can produce a desired movement in economic activity. This can include using policy to keep the country from entering a recession or to stave of high unemployment by increasing the money supply. Taxes can be levied or interest rate can be raised to control high inflation, while tax breaks and lowering interest rates can spurn stalled growth to fend off recession. Spending is the basis for our economy, both governmental and consumer.

Read More
510 Words | 3 Pages

When fiscal and monetary policy is adjusted, the government has the ability to slow down or speed up the economy. In the movie when this happened, the effects were felt. It affected prices because gas was $40 so people were counting on Taggart Transcontinental to get them where they need to go. The sudden change in supply and demand affect the gas prices. The oil spill made demand increase and supply

Read More
1160 Words | 5 Pages

2.2.2. The Adjustment phase This is the period after QE ends when the inflation rate reverts back to its natural level since it is not actively controlled by central banks. In the adjustment phase, increasing consumer and asset prices raise the demand for money balances and the supply of long-term assets. Thus the initial imbalance in money and asset markets lessens, and real asset prices begin to fall back.

Read More
226 Words | 1 Pages

1. Expansionary monetary policy reduces income inequality as well as consumption and wealth inequality. There would be heterogeneous effects of monetary policy on income: the rich benefit from a rise in the real asset returns while the poor benefit from an increase in employment. On aggregate, the channel from intra-temporal decisions is more important for accounting for why expansionary monetary policy reduces income inequality 2. In terms of welfare, the poor can hurt while the rich can benefit from expansionary monetary policy.

Read More
711 Words | 3 Pages

In order the help end the recession the United States government along with the Federal Reserve used Fiscal and Monetary to help prevent a worst catastrophe. Fiscal Policies During the Great Recession, there were quite a few Fiscal Policies implemented. The first policy to be implemented was the Economic Stimulus Act of 2008.

Read More
554 Words | 3 Pages

When the country falls into recession, the government follows numerous economic theories that could help the country fall out of recession or bring the economy to the current or better standing. One method the government uses is deficit spending. The name deficit spending doesn't really have a positive ring to it, and to be completely accurate the definition is; when purchases exceed income. However it is necessary for the government to fall into deficit spending when the country falls into recession.

Read More
166 Words | 1 Pages

Fiscal policy is the use of government spending and taxes to stimulate the economy, and project future economic outcomes. The main objective of fiscal policy is so that the president and Congress can assess current economic trends to determine if stimulation vs. restraining is required. Government spending can create jobs, and thus stimulate the economy. Consider this, when the government spends money on upgrade projects such as improvements on our highway systems, this creates jobs for both the construction industry, and its suprs. The more jobs created, the more money consumers spend on goods and services, thus stimulating the economy.

Read More
521 Words | 3 Pages

However, the government like in past, made numerous key choices that fractured the Keynesian Theory. These decisions of course then instigated fiscal policy to be examined again and it was truly necessary("Monetary and Fiscal Policy"). Lets also look at the issues that President Johnson created that somewhat “severed” the economy once again. As the U.S Department of State underlined “President Lyndon B. Johnson (1963-1969) and Congress launched a series of expensive domestic spending programs designed to alleviate poverty. Johnson also increased military spending to pay for American involvement in the Vietnam War.

Read More
2454 Words | 10 Pages

Current policy makers seem to have forgotten this, as previously during the depression, Keynes measures escaped the long depression due to a non-responsive business cycle, via large scale investments in infrastructure. Expansionary monetary only has a transitory impact on real economic activity under the rational expectations hypothesis. Austerity in the budget does not achieve its intended aim; as private agents anticipate future austerity policies such as budget cuts and tax increases thus they

Read More
1114 Words | 5 Pages

He also argued that using monetary policies such as cutting interest rates in a severe recession would also have no effect, as people were more likely to save their money rather than spend it. In Keynes opinion, the government should intervene and boost the economy through the use of expansionary fiscal policies otherwise the economy would remain in a recession. He argued that increasing aggregate demand would help bring the economy out of recession. By the government injecting capital into the economy this would set off a chain reaction.

Read More
791 Words | 4 Pages

Classical economics emphasises the fact free markets lead to an efficient outcome and are self-regulating. In macroeconomics, classical economics assumes the long run aggregate supply curve is inelastic; therefore any deviation from full employment will only be temporary. The Classical model stresses the importance of limiting government intervention and striving to keep markets free of potential barriers to their efficient operation. Keynesians argue that the economy can be below full capacity for a considerable time due to imperfect markets. Keynesians place a greater role for expansionary fiscal policy (government intervention) to overcome recession.

Read More
1571 Words | 7 Pages

Along these lines, unemployment may decrease, as this has different favorable circumstances, for example, lower government using on profits and less social issues. However, this phenomenon includes a number of different expenses. Firstly, if economic growth is unsustainable and is higher than the long run pattern rate, inflations are liable to be seen. An increase in economic growth could prompt an equalization of issued installments. In case the expanded customer expenditure causes further development, there will be an increase in the import sector.

Read More

More about Contractionary Fiscal Policy

Related Topics

Open Document