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ECN 200: Introduction to Economics Nusrat Jahan Lecture-10. Fiscal Policy and Monetary Policy . Sources of Economic Fluctuations. Aggregate Demand. Aggregate demand curve relates price level to product output purchase quantity level. It is a downward-sloping curve.

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slide1

ECN 200: Introduction to Economics

NusratJahan

Lecture-10

Fiscal Policy and Monetary Policy

slide2

Sources of Economic Fluctuations

  • Aggregate Demand
  • Aggregate demand curve relates price level to product output purchase quantity level. It is a downward-sloping curve.
  • Determinants of Aggregate demand
  • - Consumer spending
  • - Investment
  • - Government purchases
  • - Net export

Price Level

AD

GDP

  • Aggregate Supply
  • The aggregate supply curve, which relates price level to businesses' real product output production levels.
  • Determinants of aggregate supply
  • - Change in input prices
  • - Change in productivity
  • - Change in legal-institutional environment

Price Level

AS

GDP

slide3

Price Level

Price Level

AS

AS

P

P’

P’

P

AD

AD’

AD’

AD

Y’

Y

GDP

Y

Y’

GDP

Recession

Demand-pull Inflation

slide4

Ways to control economic fluctuation

1. Fiscal Policy

Fiscal Policy consists of deliberate changes in government spending and tax collections designed to achieve full-employment, control inflation and encourage economic growth.

slide5

Expansionary fiscal policy: When recession occurs expansionary fiscal policy can be implemented to prevent economic downfall.

  • During recession investment↓ as a result AD curve shifts to the left.
  • Expansionary fiscal policy can be taken 3 ways-
  •  Increased Government Spending
  •  Tax reduction
  •  Combined Government spending increases and tax reductions
slide6

Contractionary fiscal policy: When demand-pull inflation occurs, a restrictive or contractionary fiscal policy can be implemented to control it.

  • When demand-pull inflation occurs, the demand for goods & services ↑ as a result investment↑ which shifts the AD curve rightwards.
  • Contractionary fiscal policy can be taken in 3 ways-
  •  Decreased government spending
  •  Increased taxes
  •  Combined government spending decreases and tax increases
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2. Monetary Policy

  • It consists of deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy to achieve and maintain price-level stability, full employment and economics growth.
  • Expansionary Monetary Policy:
  • - It is exercised during recession.
  • - Interest rate is lowered to bolster borrowing and spending.
  • - Greater spending will create greater aggregate demand and increase real output.
  • ContractionaryMonetary Policy:
  • - Interest rate in increased in order to reduce borrowing and spending.
  • - Lower spending curtails aggregate demand and hold down price-level increases.