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Fiscal Policy - PowerPoint PPT Presentation


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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

Fiscal Policy

Chapter 12

crowding out
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
the net export effect
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!