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Module Economic Policy and the Aggregate Demand-Aggregate Supply Model odel

20. Module Economic Policy and the Aggregate Demand-Aggregate Supply Model odel. KRUGMAN'S MACROECONOMICS for AP*. Margaret Ray and David Anderson. What you will learn in this Module :. How the AD-AS model is used to formulate macroeconomic policy The rationale for stabilization policy

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Module Economic Policy and the Aggregate Demand-Aggregate Supply Model odel

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  1. 20 ModuleEconomic Policy and the Aggregate Demand-Aggregate Supply Modelodel • KRUGMAN'S • MACROECONOMICS for AP* Margaret Ray and David Anderson

  2. What you will learnin thisModule: • How the AD-AS model is used to formulate macroeconomic policy • The rationale for stabilization policy • Why fiscal policy is an important tool for managing economic fluctuations • Which policies constitute expansionary fiscal policy and which constitute contractionary fiscal policy

  3. Keynes Quiz • 20th century British economist. • Economic Consequences of the Peace, General Theory of Employment, Interest and Money • Adviser at Versailles peace conference. • Ballerina • Stock and commodity investor.

  4. Macroeconomic Policy • Self-correction? • “In the long-run, we all are dead.” • Stabilization Policy • Monetary • Fiscal (budget)

  5. Paul Solomon on Fiscal Policy Fiscal policy in USA developed in the 1930s, was formalized in the 1960s and continues today.

  6. Policy in the Face of Demand Shocks • Negative Demand Shocks & Positive Demand Shocks • Why are they bad? • Should policymakers counteract?

  7. Responding to Supply Shocks • Supply shock • Policy dilemma

  8. The Government Budget and Total Spending • GDP = C + I + G + X - M • The effect of taxes and transfers • Effects on Investment

  9. Fiscal Tools • Spending • Taxes • Transfers

  10. Expansionary and Contractionary Fiscal Policy • Expansionary Fiscal Policy • increase G • decrease taxes • increase transfers

  11. Expansionary and Contractionary Fiscal Policy • Contractionary Fiscal Policy • decrease G • increase taxes • decrease transfers

  12. Fiscal Policy Practice • Activity 30 -31 • Left side – even questions • Right side - odds

  13. How sharp are the fiscal tools? How are taxes related to GDP? How is spending related to GDP? How much of spending is mandatory vs. discretionary? How easy is it to change taxes …. or spending?

  14. Federal Government Revenue GDP = $17 trillion, Federal revenue $2.9 trillion

  15. Taxes, Government Purchases of Goods and Services, Transfers, and Borrowing GDP = $17 trillion, Federal spending $3.8 trillion

  16. Fiscal Policy On Autopilot • Automatic Stabilizers • Recession: taxes down, transfers up • Inflation: taxes up, transfers same or higher

  17. A Cautionary Note: Lags in Fiscal Policy • Time lags • Recognition lag • Decision lag • Implementation lag • Lags make decision making more difficult

  18. Summary • Expansionary vs. contractionary • Three fiscal tools • Automatic stabilizers • Limitations on fiscal policy • Time lags • Mandatory spending = 60% budget

  19. Exit Ticket • Imagine the economy is slipping back into recession. • You are on the Council of Economic Advisors (student representative). Write a quick note to the president on the pros and cons of: • Doing nothing. • Actively pursuing fiscal policy.

  20. Visualizing the U.S. Budget The U.S. Budget - A Visual Perspective - YouTube

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