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Fiscal Policy

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).

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Fiscal Policy

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  1. Fiscal Policy Chapter 12

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

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

  4. Chapter 12 Figure 12.3 Automatic Stabilizers

  5. Chapter 12 Figure 12.4(a) A Full-employment Balanced Budgetin a Recession

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

  7. Chapter 12 Table 12.1

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

  9. 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

  10. 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) • Xn = X – M falls!

  11. Chapter 12 Figure 12.5(b)

  12. Chapter 12 Table 12.2

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